Low volatility ETFs, one of the fastest-growing segments of the exchange-traded products universe, continue to gain favor with analysts and investors alike. Even with the S&P 500 within earshot of its 2007 highs, investors continue to put cash to work in low volatility ETFs.
"According to BlackRock, in the first two months of 2013, the 34 low or minimum volatility exchange traded products gathered on average $926 million in new assets each month, more than double what was added to them a year earlier," S&P Capital IQ said in a new research note.
Those inflows have benefited several "low vol" ETFs, including the highly popular PowerShares S&P 500 Low Volatility Portfolio (NYSE:SPLV). On Monday, PowerShares announced that SPLV crossed the $4 billion in assets under management mark. SPLV, the largest low volatility ETF assets, took just 22 months to reach $4 billion in AUM.
In the event of a market pullback, the allure of low volatility becomes clear and S&P Capital IQ pointed to some key statistics that highlight that point.
"For example, the S&P 500 Low Volatility Index (Low Vol) was down just 21.4% in 2008, compared to the 37.0% decline in the S&P 500 Index. In 2010, Low Vol was up 13.4%, vs. 15.1% in the broader index. But then in 2011, Low Vol Index rose 14.8% versus the 2.1% gain for the S&P 500 Index. In the five-year period ended February 2013, Low Vol's total return was 9.4%, much higher than 4.9% for the S&P 500 Index, while its standard deviation was 12.5 much lower than the 18.9 for the S&P 500 Index," according to the research firm.
Through the end of 2012 since its May 2011 debut, SPLV outpaced the S&P 500 by more than 500 basis points, according to PowerShares data. SPLV also features a monthly dividend and is rated Overweight by S&P Capital IQ.
The ETF's top-five holdings are Johnson & Johnson (NYSE:JNJ), H.J. Heinz (NYSE:HNZ), PepsiCo (NYSE:PEP), Clorox (NYSE:CLX) and General Mills (NYSE:GIS).
S&P Capital IQ also highlighted the iShares MSCI USA Minimum Volatility Index Fund (NYSE:USMV) in the note. USMV, which S&P rates Marketweight, is SPLV's chief rival among domestically-focused low volatility and now has almost $2 billion in AUM.
USMV is home to more stocks than SPLV (126 for the former and 100 for the latter). However, arguably the biggest difference between the two funds is fund at the sector level. SPLV allocates nearly 55 percent of its weight to the utilities and staples sectors while those two industry groups represent just 24 percent of USMV's weight.
Top holdings in USMV include Bristol-Myers Squibb (NYSE:BMY), McDonald's (NYSE:MCD), General Mills and Verizon (NYSE:VZ).
"All told, USMV is more diversified at the sector level than SPLV, but has less exposure to traditionally defensive sectors that typically hold up best in volatile markets. Both are inexpensive, by our analysis, and hold stocks that S&P Capital IQ views as incurring less risk. For investors looking to stay invested but hoping to reduce their risk profiles, we think both SPLV and USMV are worth further scrutiny," said S&P Capital IQ.
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