Why Low Vol ETFs See Big Demand

Low vol ETFs are delivering more than a smooth ride this year, and are attracting assets.

Reviewed by: Cinthia Murphy
Edited by: Cinthia Murphy

Low volatility ETFs aren’t designed to capture outperformance relative to the broader market. After all, low volatility isn’t the type of factor that rewards you for taking higher risk—quite the contrary.

But this year, low-vol U.S. equity ETFs are actually doing just that—delivering outsized returns relative to the S&P 500—and in the process, attracting a lot of assets.

There are 27 low vol ETFs in the market today, but when it comes to U.S. large cap equities, the low vol battle centers on two popular funds: the iShares Edge MSCI Min Vol U.S.A. ETF (USMV), and the Invesco S&P 500 Low Volatility ETF (SPLV).

These two ETFs command roughly $40 billion in combined assets, and they keep on growing. Year to date, they’ve attracted $7 billion in net creations. That’s a big number if you consider that all U.S. equity ETFs have seen a net of $14 billion in combined inflows in the first five months of the year.

In 2019, aversion to risk has been a common theme among ETF investors, who are worried about slowing global economic growth, ongoing tariff wars, Brexit and the outlook for interest rates.

In this environment of caution, low volatility ETFs have done well. USMV and SPLV are outperforming the S&P 500, as measured by the SPDR S&P 500 ETF Trust (SPY):


Chart courtesy of StockCharts.com


Key Differences

We’ve written several times about these two ETFs and their differences, which are significant and can often lead to disparity in returns.

In a nutshell, USMV is a broader portfolio, with more than 200 securities, versus SPLV’s 100-name portfolio. It selects stocks from the MSCI USA universe versus SPLV’s S&P 500 fishing pool.

USMV, unlike SPLV, also doesn’t seek to own the lowest volatility names in the space, but it considers correlation among its stocks.

“USMV focuses on building a minimum volatility portfolio,” said Elisabeth Kashner, director of ETF research for FactSet. “It optimizes for the lowest volatility portfolio, which might contain stocks with elevated volatility but negative correlation to the rest of the basket.”

The fund has constraints on sector weightings. It tries to keep sector allocations within +/-5% of their weightings in the broad market benchmark in an effort to prevent too significant sector bets. It’s a more broadly diversified approach to low vol.

‘SPLV’ A Purer Low-Vol Play

By contrast, SPLV is a purer low volatility ETF. It selects the 100 lowest vol stocks within the S&P 500 and weights them based on volatility, rebalancing quarterly. There are no sector constraints here, so at times, SPLV tilts dramatically into one sector or another.

For instance, SPLV is currently heavily allocated to utilities—about 23% of the portfolio is tied to a sector that represents only 3% of the S&P 500. For comparison, USMV also has almost three times as much weight in utilities as the S&P 500, but that allocation represents only 8% of its portfolio.

The flip side is that SPLV has only 4.7% of the mix in technology stocks, which represents 26.5% of the S&P 500.

“The biggest knock on SPLV is that its simple portfolio construction creates significant sector over- and underweights,” Kashner said.


Sector AllocationSPYUSMVSPLV
Consumer Staples7%13%9%
Health Care12.50%13.50%5.50%
Industrials 10%10%7.50%
Consumer Discretionary13%12%5%

Sources: FactSet, ETF.com


These sector tilts impact overall performance. Consider that, year to date, technology stocks in the S&P 500 are up 25%, and health care is up only 5%. But in the past month, as the S&P 500 struggled to break even, utilities and health care each rallied about 2.5%. SPLV offered better downside protection in recent weeks as the market tumbled than did USMV.

Should that matter? Outperformance is great, but it’s really not what low vol investing is all about.

“If the goal is to be in the least risky stocks, then you want to be there no matter what, and you shouldn’t have a focus on performance,” said CFRA’s Todd Rosenbluth.

Common Ground

What’s interesting is that, despite these differences in methodology, there’s a lot of overlap between these ETFs.

For starters, about 75% of SPLV’s holdings can also be found in USMV’s portfolio, according to FactSet data. Each of these funds’ top 10 holdings represent about 11-15% of the overall mix—even though USMV is a bigger portfolio, concentration in top holdings is slightly bigger than in SPLV’s. Ultimately performance lies in individual holding returns. (To see a list of their individual holdings, check out the USMV and SPLV fund pages.)

More importantly, both USMV and SPLV have a beta of around 0.7, meaning they are each delivering a ride that’s about 30% less volatile than the S&P 500 despite their portfolio differences. Historically, beta of these funds has been similar over time.

All About Price & Size

But there’s the issue of cost. USMV costs 40% less than SPLV.

With an expense ratio of 0.15%, or $15 per $10,000 invested, USMV delivers a broadly diversified minimum volatility portfolio that’s about 30% less volatile than the S&P 500. SPLV also delivers on its low vol goal, but it costs 0.25%.

That cost difference, coupled with USMV’s huge size and liquidity, could help explain why USMV is attracting the lion’s share of asset inflows.

USMV has $28.1 billion in total assets, and trades some $207 million on average a day, at spreads averaging 0.02%. By comparison, SPLV has $11.5 billion in assets—less than half USMV’s size—and sees $139 million in average daily volume.

So far this year, USMV has gathered about $5.25 billion in net creations versus SPLV’s net inflows of $1.75 billion. In other words, for every $1 SPLV gets, USMV gets $3.

“Size and liquidity are often an attention grabber for institutional investors,” Rosenbluth said. “The MSCI suite of indices is more widely used from a factor perspective, even though the low vol part of S&P/Dow is quite prominent.”

“If you’re building a factor rotation effort, as a lot of people do, size leads to investor attention,” he added. “It becomes a circular effort of assets begetting assets.”

Contact Cinthia Murphy at [email protected]

Cinthia Murphy is head of digital experience, advocating for the user in all that etf.com does. She previously served as managing editor and writer for etf.com, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.