According to traditional finance theories-investors demand a
higher rate of return for taking greater risks but some of recent
empirical studies show that the lower risk stocks have rewarded
the investors with higher return than the broader markets over
This "low risk anomaly" may be due to "mispricing" of risk by
the market or in simple words, it may be a result of too many
investors chasing higher risk stocks in anticipation of higher
returns and in turn paying too much for such stocks. (Read:
3 Excellent ETFs for Income Investors)
Though the low-volatility concept is relatively new in the ETF
universe, it has become extremely popular of late. Low-volatility
pick stocks based on their historical price volatility.
S&P 500 Low Volatility ETF (
) was the first product in this space and is so far the most
popular, with more than $3.4 billion in assets. It is one of the
most successful launches in ETF history.
A series of new low-volatility or minimum volatility ETFs have
been launched after SPLV to capitalize on soaring investor
interest in this strategy. Four new products were launched this
month, expanding the line-up to 12 products in the US. Investors
seeking to ride out frequent bouts of volatility in the markets
have continued to pour money into these funds.
We have little historical data available for these ETFs but
they have outperformed their broader market counterparts since
inception. These ETFs effectively protected the downside during
market turmoil but they underperformed when the trend was
strongly bullish. (Read:
Best ETF Strategies for 2013
For longer-term performance, we looked at the historical data
for the indexes that these ETFs track. The table shows annualized
returns and standard deviations calculated using monthly index
return data for the past five years for the low-volatility
indexes and the respective regular indexes.
Annualized Return (5 Y)
Annualized Std.Dev. (5 Y)
S&P 500 Low Volatility Index TR (SPLV)
S&P 500 TR Index
MSCI All Country World Minimum Volatility Index
MSCI All Country World Index
MSCI Emerging Market Minimum Volatility Index (EEMV
MSCI Emerging Markets Index
The results (the table above and the following charts) show
that the low volatility strategies handily beat the broader
markets with significantly less volatility, in the U.S.,
international and emerging stock markets in the last five
While it is true that the markets were in general more
volatile during the past five years, we can reasonably expect
that going forward the level of volatility in the markets will
stay at elevated levels at least in the foreseeable future.
suggest that market volatility over extended periods of time is
driven by macroeconomic environment. Given extraordinary
global macroeconomic conditions and unconventional monetary tools
employed by the central banks all over the world, market
volatility will continue to be high. (Read: Tr
easury Bond ETFs-Still Room to run
, backtesting of the index over past 20 years revealed that:
· S&P 500
Low Volatility Index was less volatile than the parent S&P
500--24% volatility reduction over 20 years and 32% volatility
reduction over most recent 10 years.
volatility did not mean lower returns as S&P 500 Low
Volatility Index outperformed the S&P 500 for the 20 year
period and in 9 of the 20 years between 1991 and 2010.
analyzed the stock returns from 1968 through 2008 and found
Based on the above, I think that we can safely infer that
low-volatility stocks and ETFs are very attractive investments
for longer-term investors who focus on risk-adjusted returns.
PowerShares S&P 500 Low Volatility ETF (
SPLV tracks the S&P 500 Low Volatility Index, which
consists of 100 stocks from the S&P 500 Index with the lowest
realized volatility over the past 12 months.
ETF currently has an attractive 12-month yield of 2.83%, while
it charges an expense ratio of 0.25% per year.
The ETF holds 100 securities currently, mostly from the
Consumer Staples (24%), Utilities (31%) and Financials (15%)
sectors. The ETF has returned 7.53% year-to-date. It is a Zacks
#1 (Strong Buy) ETF.
iShares MSCI All Country World Minimum Volatility Index
ACWV is ideal for investors looking for low-volatility product
with global exposure. It tracks MSCI All Country World Minimum
Volatility Index, which is a capitalization weighted index of
securities in the developed and emerging economies that have
lower absolute volatility. The weight of the stocks in the index
is determined by a rules based methodology.
The ETF holds 264 securities which are mainly from the
Consumer Staples (15%), Healthcare (15%) and Financials (16%)
ACWV has an expense ratio of 0.35% and a 12-month yield of
1.83% currently. The fund invests about 51% of its assets in US
securities while Japan (12%) and Canada (8%) occupy the next two
spots in terms of country exposure.
The fundt has returned 6.76% year-to-date.
iShares MSCI Emerging Market Minimum Volatility Index
EEMV is an ideal choice for the investors looking to
participate in the emerging markets growth while limiting their
The ETF holds 213 securities from the Financials (27%),
Consumer Staples (13%) and Telecom (12%) sectors. Taiwan (16%).
China (14%) and South Korea (10%) are the top countries in terms
The fund charges a low expense ratio of 25 basis points while
the 12-month is 1.64%. It is a Zacks #2 (Buy) ETF.
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ISHARS-MS WMVIF (ACWV): ETF Research Reports
ISHARS-MS EMMV (EEMV): ETF Research Reports
POWERSH-SP5 LVP (SPLV): ETF Research Reports
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