Low volatility ETFs aren’t designed to capture outperformance relative to the broader market. After all, low volatility isn’t the type of factor that rewards you for taking higher risk—quite the contrary.
But this year, low-vol U.S. equity ETFs are actually doing just that—delivering outsized returns relative to the S&P 500—and in the process, attracting a lot of assets.
There are 27 low vol ETFs in the market today, but when it comes to U.S. large cap equities, the low vol battle centers on two popular funds: the iShares Edge MSCI Min Vol U.S.A. ETF (USMV), and the Invesco S&P 500 Low Volatility ETF (SPLV).
These two ETFs command roughly $40 billion in combined assets, and they keep on growing. Year to date, they’ve attracted $7 billion in net creations. That’s a big number if you consider that all U.S. equity ETFs have seen a net of $14 billion in combined inflows in the first five months of the year.
In 2019, aversion to risk has been a common theme among ETF investors, who are worried about slowing global economic growth, ongoing tariff wars, Brexit and the outlook for interest rates.
In this environment of caution, low volatility ETFs have done well. USMV and SPLV are outperforming the S&P 500, as measured by the SPDR S&P 500 ETF Trust (SPY):
Chart courtesy of StockCharts.com
Key Differences
We’ve written several times about these two ETFs and their differences, which are significant and can often lead to disparity in returns.
In a nutshell, USMV is a broader portfolio, with more than 200 securities, versus SPLV’s 100-name portfolio. It selects stocks from the MSCI USA universe versus SPLV’s S&P 500 fishing pool.
USMV, unlike SPLV, also doesn’t seek to own the lowest volatility names in the space, but it considers correlation among its stocks.
“USMV focuses on building a minimum volatility portfolio,” said Elisabeth Kashner, director of ETF research for FactSet. “It optimizes for the lowest volatility portfolio, which might contain stocks with elevated volatility but negative correlation to the rest of the basket.”
The fund has constraints on sector weightings. It tries to keep sector allocations within +/-5% of their weightings in the broad market benchmark in an effort to prevent too significant sector bets. It’s a more broadly diversified approach to low vol.
‘SPLV’ A Purer Low-Vol Play
By contrast, SPLV is a purer low volatility ETF. It selects the 100 lowest vol stocks within the S&P 500 and weights them based on volatility, rebalancing quarterly. There are no sector constraints here, so at times, SPLV tilts dramatically into one sector or another.
For instance, SPLV is currently heavily allocated to utilities—about 23% of the portfolio is tied to a sector that represents only 3% of the S&P 500. For comparison, USMV also has almost three times as much weight in utilities as the S&P 500, but that allocation represents only 8% of its portfolio.
