Low-Volatility ETFs Bring Big Gains at a Low Cost
One of the original risk-managed ETFs is proving its worth.
Low-volatility ETFs, one of the original exchange-traded fund strategies to try to temper mercurial markets, are living up to their promise and outperforming during the current market selloff.
Low Volatility, Big Gains
The two biggest low-volatility, or minimum volatility, ETFs by assets under management are positive year to date, with the $23.5 billion iShares MSCI USA Minimum Volatility Factor ETF (USMV) up 3% and the $7.6 billion Invesco S&P 500 Low Volatility ETF (SPLV) up 3.2%. Both are outperforming the Vanguard S&P 500 ETF (VOO), which is down 4.8% as of midday Friday.
Despite the solid gains, these funds have barely seen any inflows this year. That could be a result of these funds being forgotten by financial advisors in a world where defined-outcome and buffered ETFs are current darlings. Unlike those ETFs, which use complex options strategies to mitigate market weakness, the low-volatility ETFs use factor investing—tilting to names that gyrate less while staying fully invested in the market.
Low-volatility ETFs also cost less than options-based strategies. USMV's annual expense ratio is 0.15%, and SPLV costs 0.25%. Comparatively, a fund such as the JPMorgan Equity Premium Income ETF (JEPI) costs 0.35% and is down 1.7% year to date. One of the most popular defined-outcome ETF fund issuers, Innovator, prices its funds around 0.79%. Its U.S. Equity Buffer ETF March Series (BMAR) is down 1.6% this year.
The Tradeoff
Minimum-volatility funds promise a steadier experience over the long run, but they do underperform when high-flying growth stocks dominate, as has been the case during the past few years. Annualized performance on a five-year basis shows USMV lagged by 6.5% while SPLV lagged by 8.4%. However, when the S&P 500 lost 19.4% in 2022 and 6.2% in 2018, the funds outperformed, showing that their risk-management strategy works.
Not all low-volatility funds are built equally. The iShares fund looks at stocks’ individual volatility levels and its relationship to other holdings while limiting sector overweighting versus its benchmark. The Invesco fund heavily weights defensive sectors, such as consumer staples and utilities, currently at nearly 31% of the fund. Those weightings will influence portfolio outcomes.
John Jones, investment advisor representative at Heritage Financial, uses several types of lower-volatility funds when he’s looking for a more conservative investment to weather mercurial conditions. He likes these.
“We’ve learned in the past decade that bonds have just as much risk as stocks,” he said. “In times like these when you have this volatility, that’s where they really come through for the investor.”
