Why Low-Volatility ETFs Remain Popular

by: Tom Lydon

Low-volatility exchange traded funds managed to gain $4.6 billion in new inflows last year and are showing no sign of slowing down. Stock market volatility has been lower in recent months, but investors are still weary and ready for any market uncertainty as the sequestration deadline looms.

"The effects of the 2008 and 2009 time period are still ringing through to investors' perception of historical returns and future returns," David Mazza, head of ETF investment strategy for the Americas at SSGA, said in a recent Ignites.com report.

"We see clients are increasingly interested in the upside participation that comes with investing in equities but also have an eye on downside protection. So they are looking for and embracing a return pattern that has less volatility," he adds.

ETF sponsors are well aware of the popularity that low-volatility products are experiencing. For example, both PowerShares and State Street Global Advisors have rolled out new low volatility ETFs that join existing line-ups. The growth opportunity that these stocks give clients are risk-adjusted, so those who have low tolerance can sleep at night should the market swing.

The upside of low volatility stocks is that investors still get to gain from any potential run-up. The downside protection is what investors are after, whether it is in their heads or in the markets.

However, recent research suggest that low volatility portfolios outperform higher volatility portfolios over the long term, reports Jackie Noblett for Ignites. Furthermore, S&P summarized the existing research and tested its own strategies. Results indicated that low-volatility strategies had better risk-adjusted returns over 10, 15, and 20-year periods, but performance was mixed over shorter time horizons.

The VIX volatility index reflected that overall stock market volatility was three times higher post 2008 credit crisis and after the 2011 U.S. credit rating downgrade.

The latest low-volatility ETFs to launch:

  • PowerShares S&P MidCap Low Volatility Portfolio (NYSEARCA:XMLV)
  • PowerShares S&P SmallCap Low Volatility Portfolio (NYSEARCA:XSLV)
  • SPDR Russell 1000 Low Volatility ETF (NYSEARCA:LGLV)
  • SPDR Russell 2000 Low Volatility ETF (NYSEARCA:SMLV)

PowerShares S&P 500 Low Volatility ETF

Tisha Guerrero contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.