Although markets are still hovering near all-time highs, some
cracks are beginning to appear in the growth story. Stocks have
experienced some uncertainty as of late and now volatility is
once again a concern for a few investors.
Some are now seeking exposure to equities with some downside
protection to their portfolios. As a result, the low volatility
funds are gaining immense popularity as they provide improved
risk adjusted returns in a choppy market.
With this trend, State Street, the second-largest ETF provider
globally, has debuted two new low volatility funds. This marks
State Street's entry into the low-volatility equity space.
The two funds, the
SPDR Russell 1000 Low Volatility ETF (
SPDR Russell 2000 Low Volatility ETF (
both focus on low volatility stocks, but target different cap
levels of the U.S. market.
This launch comes within a week after Invesco PowerShares
rolled out two additional funds, expanding its low volatility ETF
PowerShares Expands Low Volatility ETF
LGLV and SMLV in Focus
LGLV looks to track the Russell 1000 Low Volatility Index,
which measures the performance of the U.S. large capitalization
low volatility market (read:
Do Large Cap ETFs Signal Trouble Ahead?
). Holding 92 securities in the basket, the fund is widely spread
across various sectors and individual companies and charges 20
bps in fees per year from investors.
The product puts nearly 21% of the assets in top 10 holdings
and none of the firms holds more than 2.4% of LGLV. Heinz (
), General Mills (
) and Procter & Gamble (
) occupy the top three positions in the basket.
From a sector look, consumer staples, healthcare, industrials,
utilities, financials, consumer discretionary, information
technology, energy, telecom services and materials make a nice
mix in the portfolio.
SMLV looks to track the Russell 2000 Low Volatility Index,
which measures the performance of the U.S. small capitalization
low volatility market. It holds 170 securities in the basket and
puts less than 20% of the assets in top 10 holdings.
Ryman Hospitality (
), Pool Corporation (
) and UNS Energy (
) are some of the top holdings. Unlike LGLV, the ETF is slightly
skewed towards financials, and utilities, industrials, consumer
discretionary and information technology round off to the next
four spots. In order to gain a decent exposure, investors have to
spend 25 bps in annual fees for the product.
How does it fit in a portfolio?
These products could be an interesting choice for investors
seeking to take advantage of the current state of affairs in
which lower risk securities are in high demand thanks to broad
geopolitical risk both at home and abroad.
Low volatility products have proven beneficial for investors
given their superior risk adjusted returns. The funds have
attracted a lot of attention in recent months due to increased
market volatility (read:
Time to Invest in Low Volatility ETFs?
The two new
will be the low cost choices and smaller allocations to each of
the securities could keep the portfolio balanced among the
various companies, and prevent heavy concentration.
Can It Succeed?
There is still an appetite for these kinds of securities
despite a good number of choices already in the space.
The large cap U.S. focused ETF faces tough competition from
the most popular PowerShares S&P 500 Low Volatility Portfolio
), which has roughly $3.4 billion in AUM. The portfolio comprises
stocks from the entire universe of the S&P 500 stocks that
have exhibited lowest historic volatility over the trailing
The ETF holds over 100 stocks in total and charges investors
25 basis points a year in fees (read:
Zacks Top Ranked Low Volatility ETF in Focus
The next popular ETF is the MSCI USA Minimum Volatility Index
). This ETF has amassed over $1.6 billion in assets and holds 126
securities. The fund also benefits from a cheaper fee of 15 basis
points annually (see more ETFs in the
Coming to small caps, there is currently one fund in the space
- S&P SmallCap Low Volatility Portfolio ETF (
). This ETF debuted on Feb 15, 2013 by PowerShares with AUM of
$2.5 million. It tracks the S&P SmallCap 600 Low Volatility
Index, holding 120 stocks and charging 25 bps in annual fees.
Investors should note that the low volatility funds are a
recent development as these have been introduced in the last 20
months or so. Given this, the new ETFs from State Street could
see big inflows and solid investor interest, making them
successful products in the future.
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GENL MILLS (GIS): Free Stock Analysis Report
HEINZ (HJ) CO (HNZ): Free Stock Analysis
(LGLV): Get Free Report
PROCTER & GAMBL (PG): Free Stock Analysis
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