With the broad equity indexes hovering around their all-time
highs, we expect the markets to become more volatile as we move
further into 2013. Investors are now keeping a close watch on the
market movements, waiting to see if the rally continues or
Keeping this uncertainty in mind, PowerShares, one of the
issuers, has launched two new style funds providing investors
access to low-volatility strategies. This marks its first product
launch this year.
The two funds, the
S&P MidCap Low Volatility Portfolio ETF
S&P SmallCap Low Volatility Portfolio ETF
target the U.S. market, focusing on mid-cap and small- cap stocks
Do Large Cap ETFs Signal Trouble Ahead?
). The launch increases the PowerShares low volatility ETF family
XMLV and XSLV in Focus
XMLV looks to track the S&P MidCap 400 Low Volatility
Index, holding 80 stocks in the basket while XSLV tracks the
S&P SmallCap 600 Low Volatility Index, holding 120
Both products put less than 2% of assets in individual
securities, ensuring high levels of diversification. National
Retail Properties (
), Westar Energy (
) and Alliant Energy (
) occupy the top 3 positions in the mid- cap fund while Allete (
), UNS Energy (
) and UIL Holdings (
) are the top 3 elements in XSLV.
Both funds are heavily skewed towards financials, closely
followed by utilities. Other sectors like consumer staples,
healthcare, industrials, information technology, materials and
telecom make a nice mix in the portfolio.
Unsurprisingly, this structure results in a value tilt for
both the products. XMLV has roughly three-fifths of its assets in
mid-cap value, with just 11% going to mid-cap growth stocks.
Similarly, three-fourth of XSLV focuses on small-cap value while
23% goes to growth stocks (read:
Time to Consider Pure Growth and Value ETFs?
How does it fit in a portfolio?
These products could be an interesting choice for investors
seeking exposure to the U.S. mid- and small-cap equities in the
currently shaky market environment. If markets remain weak in
2013, low volatility funds may prove to be safe bets for
These ETFs will be the low cost choices, charging only 25
basis points a year in fees. Additionally, almost equal
allocations to each of the securities could keep the portfolio
balanced among the various companies, and prevent a heavy
Low volatility ETFs are mainly suitable for low risk-tolerance
investors. These generate decent and often impressive returns
above their higher volatility counterparts at times of market
Time to Invest in Low Volatility ETFs?
). This is because these funds generally include those stocks in
their portfolio that have shown more stability in the past and
have experienced the least movement.
Can it succeed?
There have been a good number of choices in the low volatility
ETFs space. Currently, there are over 8 low volatility options on
the market, although just 3 track the U.S. equities.
The most popular in the space is the PowerShares S&P 500
Low Volatility Portfolio (
), which has roughly $3.4 billion in AUM. The ETF zeroes in on
low volatility securities in the S&P 500, holding over 100
stocks in total and charging investors 25 basis points a year in
fees for the service (read:
Zacks Top Ranked Low Volatility ETF in Focus
The next popular product in the space is the MSCI USA Minimum
Volatility Index Fund (
). This ETF has amassed over $1.3 billion in assets and holds 126
securities. The fund also benefits from a cheaper fee of 15 basis
Apart from these U.S. funds, iShares MSCI Emerging Market
Minimum Volatility Index fund (
) also has an impressive $ 2 billion in assets, charging 25 bps
in annual fees. This ETF however focuses on emerging market
securities making it entirely different from the new XMLV and
XSLV (see more ETFs in the
Investors should note that the low volatility funds have been
introduced in the last 20 months or so, suggesting that the move
to low volatility options is a recent development. Given this,
the new ETFs from PowerShares could be jumping into a hot market,
suggesting that if they can keep costs down and volatility low,
they could see big inflows and solid investor interest.
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