Low Volatility Mid-Cap ETF Provides Refuge, Too

Like their large and small-cap peers, mid-caps have not been insulated from the recent downturn and rise in volatility endured by U.S. equity markets.

However, as has been the case with other cap spectrums, including smaller stocks, low volatility exchange traded funds emphasizing mid-caps have been significantly less bad than their traditionally-weighted counterparts.

In the case of low volatility mid-cap ETF, the PowerShares S&P MidCap Low Volatility Portfolio (NYSE:XMLV) has that particular market niche to itself. Over the past 90 days, XMLV is off about 2.9 percent, but that is nearly 500 basis points better than the S&P MidCap 400 Index, 300 basis points better than S&P MidCap 400 Growth Index and more than 700 basis points superior to the woeful 9.95 percent lost by the S&P MidCap 400 Value Index over that period.

Volatility is a statistical measurement of the magnitude of up and down asset price fluctuations over time, according to PowerShares.

Those statistics are significant because XMLV allocates almost 54 percent of its combined weight to mid-caps with either the growth or value designations. Be advised that over 21 percent of the ETF's holdings are actually small caps.

XMLV applies a similar methodology as what is used by the popular PowerShares S&P 500 Low Volatility Portfolio (NYSE:SPLV). Whereas SPLV is comprised of the 100 S&P 500 stocks with lowest trailing 12-month volatility, XMLV are the 80 S&P MidCap 400 Index members with the lowest trailing one-year volatility.

Like SPLV, XMLV's largest sector weight is financial services, but that sector really charts the course for the mid-cap with an allocation of almost 49.3 percent or more than quadruple XMLV's second-largest sector weight, industrials. XMLV also features no exposure to the energy and telecommunications sectors.

Given that these funds are structured in a dynamic sense with the ability re-balance should conditions change over time, it will be interesting to revisit them over time to see if this still holds true going forward in terms of the Financial sector continuing to display the lowest realized volatility across the U.S. industry sectors, said Street One Financial Vice President Paul Weisbruch in a note out Thursday.

Critics of low volatility ETFs say that long-term investors must endure sub-par returns relative to the traditionally-weighted benchmark in exchange for the reduction in volatility. However, XMLV's underlying index has lagged the S&P MidCap 400 by just 26 basis points since, inception according to PowerShares data.