Innovation has come to be expected in the ETF industry, where a number of developments over the last several years have made a number of new asset classes and investment strategies accessible through the low-cost, tax-efficient exchange-traded structure. From leveraged ETFs to commodity ETPs to VIX-based products, there have been a number of “firsts” in recent history that have expanded the size of the ETF toolbox dramatically.
One of the noteworthy ETF trends in 2011 has been the development of products that offer investors exposure to strategies focused on specific factors or investment disciplines through a rules-based, indexing approach. A number of the new additions to the ETF lineup so far in 2011 target sub-sections of broad-based stock indexes that exhibit certain quantifiable characteristics, such as high or low beta, or high momentum. These strategies are nothing new; financial advisors have been targeting stocks with certain attributes for decades. But the combination of these approaches within the ETF wrapper is relatively new–and potentially very exciting. This marriage delivers low maintenance, low cost access to stock portfolios that go beyond the plain vanilla, own-the-market route, potentially allowing investors to fine tune their stock exposure [for more ETF ideas, sign up for the free ETFdb newsletter].
Low Volatility ETFs
Low volatility ETFs have become especially popular recently, perhaps as a result of the lingering uncertainty in the current environment. These ETFs generally are designed to target stocks that have historically exhibited low volatility, meaning that the portfolios should offer stability relative to the broad-based benchmarks form which stocks are selected. So far in 2011, eight new ETFs have popped up offering exposure to low volatility strategies:
PowerShares S&P 500 Low Volatility Portfolio (SPLV)
This ETF offers exposure to a basket of S&P 500 components that have exhibited the lowest realized volatility over the last 12 months. Given this focus on low volatility large cap stocks, SPLV could be useful as an alternative to SPY for those looking to smooth out volatility in their portfolios.
SPLV has about 100 holdings, and not surprisingly features some tilts towards corners of the market known for stability; utilities (32%) and consumer staples (30%) account for a big portion of total assets. SPLV has been tremendously popular since launching in May, thanks perhaps in part to a relatively low expense ratio of just 0.25%. This ETF has already gathered more than $700 million in AUM, making it one of the most successful new ETFs in 2011 [see SPLV fact sheet].
Russell 1000 Low Volatility ETF (LVOL)
This ETF tracks the Russell-Axioma U.S. Large Cap Low Volatility Index, a benchmark that is designed to deliver exposure to U.S. large cap stocks that display low volatility. The fund’s underlying holdings consist of some of America’s largest companies, including Exxon Mobil (XOM), IBM, and McDonald’s (MCD)–all companies that have been able to maintain relatively stable returns and low levels of volatility.
LVOL’s underlying assets offer investors access to a wide array of sectors at a relatively low expense ratio of 0.20%. The fund’s holdings are slighted biased towards the consumer defensive and utilities sectors, which are known for their higher dividend yields and stable returns [see LVOL fact sheet].
iShares MSCI Emerging Markets Minimum Volatility Index Fund (EEMV)
iShares’ EEMV is an appealing option for investors who wish to maintain a relatively low risk profile while still gaining access to higher growth equities. The fund is comprised of low volatility stocks from some of the world’s fastest growing economies, including China, Brazil, and India.
Considering the fund’s objective, it is surprising to see significant allocations towards the financial services and energy sectors, which are considered to be the riskier corners of the equities market. EEMV does, however, allocate some if its holding towards the more stable utilities sector as well as to the large-cap equities. This fund is an attractive alternative for those who wish to tap into emerging markets without encountering a significant amount of risk.
iShares MSCI All Country World Minimum Volatility Index Fund (ACWV)
This ETF covers the global equity market, offering investors exposure to low volatility stocks from both developed and emerging markets. ACWV has a deep, well-balanced portfolio of over 270 individual securities that range across different levels of market capitalization, sectors, and regions.
ACWV’s underlying holdings are, not surprisingly, tilted toward more stable consumer defensive and health care sectors. Although the fund is primarily invested in more developed countries like the U.S., Canada and Switzerland, it is an appealing option for investors wanting to achieve global equities exposure at low risk and low cost.
iShares MSCI EAFE Minimum Volatility Index Fund (EFAV)
This ETF tracks the MSCI EAFA Minimum Volatility Index, a benchmark that aims to reflect the performance characteristics of a minimum variance strategy across the European, Australian,the Middle East, and Far East regions. EFAV’s portfolio consists of 165 large and mid cap equities from 22 different developed markets, excluding the U.S. and Canada.
The fund allocates a significant amount of its holdings towards equities from Japan and United Kingdom, which account for nearly 30% and 24% of the portfolio’s total assets, respectively. Exposure to the troubled euro-zone countries such as Italy is relatively small, further lowering the fund’s risk profile.
iShares MSCI USA Minimum Volatility Index Fund (USMV)
USMV offers investors targeted exposure to domestic equities that exhibit lower absolute volatility than the broad U.S. stock market. The fund’s underlying index selects the top 85% by market capitalization of equity securities listed on U.S. stock exchanges, which in total amount to 127 individual securities.
Although USMV’s portfolio is rather shallow, it is relatively well-balanced with only 16% of the fund’s total assets lying in its top ten holdings. The fund’s underlying holdings consists of some of the U.S.’s largest and most popular companies, including McDonald’s Corporation (1.75%), Microsoft Corporation (1.58%), and Wal-Mart Stores Inc. (WMT) (1.57%).
Russell Developed ex-U.S. Low Volatility ETF (XLVO)
This ETF seeks to replicate the Russel-Axioma Developed ex-U.S. Large Cap Low Volatility Index, a benchmark that is designed to deliver exposure to stocks that have exhibited low volatility over the last 60 days. The short time frame over which the equities are measured allows the fund to reconstitute its holdings monthly, eliminating any stocks that exhibit significantly higher volatility relative to its prior level.
With its debut in early November, XLVO is one of the newest funds from this category to hit the market. Investors should keep a close eye on this fund as it may serve as a tactical tool to gain exposure to ex-U.S., low-volatility, global equities at a low expense ratio of just 25 basis points.
Russell 2000 Low Volatility ETF (SLVY)
SLVY is the only low-volatility ETF on this list that offers investors exposure to small and micro cap equities, which can provide strong growth prospects and diversification benefits to a portfolio. The fund’s underlying index consists of a targeted portfolio of low-volatility securities that in total account for 35% of the Russell 2000 Index.
SLVY currently has 196 holdings with heavy allocations towards the utilities sector, which accounts for nearly 24% of the fund’s total assets. The fund maintains a relatively balanced portfolio with roughly 20% of its assets lying in its top ten holdings, making it an attractive option for investors wishing to tap into the U.S. small cap market while avoiding significant risk.
Disclosure: No positions at time of writing.
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