There’s A New ETF Inflow Asset Leader

The SPDR Gold Trust (GLD | A-100) remains the flows leader for 2016 thanks to huge investor interest in the yellow metal. But another ETF is quietly nipping at the heels of the venerable gold fund thanks to big inflows of its own.

In the year-to-date period through April 29, the iShares MSCI USA Minimum Volatility ETF (USMV | A-71) has taken in $4.7 billion in investor capital, second only to $6.2 billion for GLD, according to FactSet data.

USMV now boasts an impressive $12.4 billion in assets under management, and of course, GLD is no slouch either, with $33.5 billion in assets.

Low-Volatility Portfolio

The fact that there's been tremendous volatility and two big stock market corrections in the past eight months may be why USMV has seen such a surge of interest from investors.

As the name suggests, the fund aims to minimize the volatility of its portfolio. It does this by holding a basket of stocks that together have low-volatility characteristics. Unlike the competing PowerShares S&P 500 Low Volatility ETF (SPLV | A-58)―which simply holds the 100 least volatile stocks in the S&P 500― USMV considers the correlations between various stocks to come up with its optimized mix.

Sector Tilts

The low-volatility strategy has given these funds striking sector tilts relative to the broader market. For example, financials are the largest sector weighting for USMV, while technology is the largest for the SPDR S&P 500 (SPY | A-98).

Additionally, consumer staples and utilities―two sectors well known as safe and as having low volatility―hold a much greater weighting in USMV compared with SPY. Staples represent 14.6% of USMV and 10.2% of SPY, while utilities represent 8.5% of USMV and 3.3% of SPY.

It's also worth noting that energy—which was a big weight on the performance of the broader market last year—only accounts for 2.1% of USMV's portfolio, versus 7.3% for SPY.

Outperformance This Year

Performancewise, USMV has thrived this year amid the wild up and down swings in the broader stock market. The ETF is up 4.6% year-to-date, compared with a gain of 1.1% for SPY. SPLV has outperformed as well, with a return of 3.9%.

YTD Returns For SPY, USMV, SPLV

Importantly, the low-volatility ETFs went down much less than other ETFs during the market swoon earlier this year. USMV and SPLV saw a maximum drawdown of about 6%, compared with more than 10% for SPY.

Overvalued?

Longer term, there are some who believe these ETFs can continue to outperform. They point to academic research that suggests there is a "low-volatility factor" that has historically provided a risk premium over broader market returns.

Others suggest that the outperformance in low-volatility strategies may not continue, because the underlying stocks are overvalued after so many investors rushed into them.

"Low-volatility strategies have experienced considerable inflows, strong performance so far in this business cycle and appear to be crowded," said Dubravko Lakos-Bujas, quantitative strategist at J.P. Morgan.

"Valuation of low-volatility style is at an all-time extreme," he added, and "their performance has been likely exaggerated by prolonged zero interest rates and sequential quantitative easing by central banks."

Low-Vol Outperforming Internationally Too

In any case, as long financial markets remain tumultuous, USMV, SPLV and similar ETFs are likely to gather more and more assets.

In fact, there's another low-vol fund on the top 10 flows list for this year―the iShares MSCI EAFE Minimum Volatility ETF (EFAV | A-68)―with inflows of $1.9 billion. EFAV is similar to the aforementioned USMV, except it extends the winning low-volatility strategy to international markets.

Year-to-date, EFAV is beating its vanilla counterpart, the iShares MSCI EAFE ETF (EFA | A-93), with a gain of 3.6%, compared with a loss of 0.4%.

YTD Returns For EFAV, EFA

April 2016 YTD Flows

Contact Sumit Roy at [email protected].