As of the end of last month, low volatility ETFs have seen a full $13B of inflows this year, and over the last 12 months, the MSCI World Minimum Volatility Index has surged 13.3% vs. a 0.5% decline for the MSCI World Index.
Thanks to pricier valuations for low vol names, SSgA head of research Dave Mazza suggests the next 12 months, not to mention the next three to five years, won't be as favorable. If you're buying low vol to help smooth out your portfolio's volatility for the long-term, that's fine, he says, but if you're looking for better returns than a broader index, you'll be disappointed.
Commonwealth Financial Networks portfolio manager Peter Essele: "Every dollar that moves in [to low volatility] is becoming more and more exposed to overweighted securities that are trading well above long-term averages."
"There are a lot of dumb ideas now masquerading as smart beta," says Rob Arnott. "My fear is that a potential crash that we hypothesized—in a few overvalued ‘smart beta’ strategies—may make the ‘smart beta’ label a subject of future jokes, and a chapter in the [Chartered Financial Analyst] program."
Smart-beta ETFs have received record inflows over the past year, and the vast majority of new ETFs launched this year have been smart-beta products, according to ETFGI.
Low-volatility ETFs have garnered $14.32B YTD, while value-oriented strategies have received $6.83B, and dividend-oriented $3.09B.
Arnott: "Many of the most popular new factors and strategies have succeeded solely because they have become more and more expensive ... If valuations were to revert back to their historical levels, these recently popular strategies can bring terrible performance."
That the valuations on these popular names are stretched isn't new news, but, putting numbers on it, JPMorgan's Dubravko Lakos-Bujas says prices are 30% above levels justified by profitability, and 10% above fair value based dividend growth.
This can be resolved in one of two ways, he says: Either momentum stocks snap back, causing low-vol to lag, or the whole market turns lower. Either way, investors in USMV or SPLV, to name two, should take caution.
“A lot of people don’t believe in the rally,” says Pravit Chintawongvanich, from Macro Risk Advisors. "Lw volatility stocks are going to be things like utilities, consumer staples, telecoms, real estate investment trusts -- sectors that have outperformed."
Checking the scorecard, USMV is higher by 1.8% this year, outperforming the S&P 500 410 basis points. On a year-over-year basis, USMV is doing better by about 760 basis points.
Volatility in the PowerShares S&P 500 Low Volatility ETF (NYSEARCA:SPLV) has been higher than the S&P 500 each day since Feb. 27, according to Bloomberg, with the gap peaking at 244 basis points on March 18 - the widest since the ETF opened for business in 2011.
“There’s no guarantee that the name of an ETF, the label, means it’s going to perform the way it’s advertised,” says Morningstar's Michael Rawson. “Investors need to know there’s no magic formula.”
The SPLV holds the 100 stocks in the S&P 500 which have fluctuated the least over the prior 12 months. One reason for the high volatility of late, says Rawson, could be energy stocks - the SPLV owns none vs. the S&P's 8.24% weighting, and volatility in the energy names tumbled lower in March.
The Compass EMP U.S. Discovery 500 Enhanced Volatility Weighted Fund (Pending:CSF) will include only companies with consistent positive earnings (at least its 4 most recent quarters) and is weighted based on the volatility of each stock.
According to a regulatory filing, stocks with lower volatility receive a higher weighting, while stocks with higher volatility will receive a lower weighting in the fund.
Earlier this month, Compass EMP launched its first three ETFs, all of which feature a volatility-targeting strategy and fall into the trendy "smart beta” umbrella.
Traditionally a mutual fund issuer, Compass EMP is striking out into the ETF industry with the creation of 3 smart beta funds, each tracking an index made by Compass EMP.
The Compass EMP U.S. EQ Income 100 Enhanced Volatility Weighted Fund (CDC), Compass EMP U.S. 500 Volatility Weighted Index ETF (CFA), and Compass EMP U.S. 500 Enhanced Volatility Weighted Index ETF (CFO) will all begin trading on July 2nd.
These funds all feature a focus on volatility management and will charge an expense ratio between 58 and 68 basis points.
The three new offerings will offer "min vol" fans global exposure with the iShares MSCI ex-Japan Minimum Volatility ETF, the iShares MSCI Europe Minimum Volatility ETF, and the iShares MSCI Japan Minimum Volatility ETF.
BlackRock's existing minimum volatility offerings include the USA Minimum Volatility ETF (USMV).
Barely in the green for the year at the moment, the S&P 500 could slide 10% between now and October, says the technician, but there's a stealth bear market already happening in the Nasdaq, S&P Mid-Cap, and Russell 2000, and when support breaks (less than another 2%), those indices could see 20-25% declines.
The situation reminds him of 1994 when the Dow and S&P were in a trading range all year, but things were falling apart underneath the surface.
Following the washout into October, though, Acampora sees a "very, very strong Q4."
State Street rolls out 2 low-volatility ETFs: SPDR Russell 1000 Low Volatility (LGLV) and SPDR Russell 2000 Low Volatility (SMLV). SMLV has an expense ratio of 0.25% while LGLV is the cheapest among peers at 0.20%. Competitors SPLV, IDLV, XMLV and XSLV charge 0.25% while EELV charges 0.29%. Demand for low volatility ETFs has picked up due to recent risk-adjusted outperformance vs. standard market cap weighted funds. Feb. 21, 2013, 4:26 PM
Feb. 15, 2013, 3:41 AM
PowerShares expands its Low Volatility ETF suite with 2 new ETFs: S&P MidCap Low Volatility (XMLV) and S&P SmallCap Low Volatility (XSLV). The ETFs come with a 0.25% expense ratios, in line with counterpart IDLV (0.25%) and SPLV (0.25%), and slightly less than EELV (0.29%). Over the recent 1-year period, SPLV returned 16.36%, 68 basis points better than SPY, with an SD of just 8.6% vs. 12.8% for SPY. (pdf) Feb. 15, 2013, 3:41 AM|1 Comment