Bitten But Not Mauled, Low Volatility ETFs Attract Fans

Money is pouring in from investors looking to soften a bear market beating.

World Bear Market: Is More Volatility Ahead?

As wild stock market swings fray investor nerves, exchange-traded funds promising a measure of calm are, not surprisingly, gaining adherents. Such low-volatility ETFs offer a way to stay in the market while sidestepping the beating everyone else is getting.

About $2.3 billion has flowed into these ETFs so far this year—a minor miracle, considering that equity ETFs as a whole have seen $23 billion flow out. The bulk of the new money has gone into the $8.1 billion iShares MSCI USA Minimum Volatility ETF (USMV), which aims to be a more sedate version of a U.S. large-cap stock index1. The PowerShares S&P 500 Low Volatility Portfolio (SPLV), which simply holds the 100 least-volatile stocks in the Standard & Poor's 500-stock index, has seen $120 million come in to boost assets to $5.5 billion.

So far, in this newly christened bear market, the ETFs have been living up to their promise. They are down a lot less than the markets as a whole. The table below shows the five largest low-volatility ETFs, all of which have over a billion dollars in assets. 

USMV and SPLV are outpacing the S&P 500 by 6.5 percentage points and 6.8 percentage points, respectively. Such protection from the worst of the downside explains why the universe of low-volatility ETFs has doubled in size over the past two years, from $11 billion in assets to $27 billion. 

The cost of the smoother ride, aside from minimal expense ratios2, is sharing in less stock market upside. Low volatility products will, more than likely, trail the market when things are booming. In 2011, when the S&P 500 was returning 32 percent, SPLV had a return of 23 percent. In return for the muted reaction on the way down, your return lags on the way up.

In a steady bull market, that's not very appealing. These days, many investors see it as a small price to pay to avoid a Revenant-esque attack on their portfolios.

Eric Balchunas is an exchange-traded-fund analyst for Bloomberg. This story was edited by Bloomberg News.

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  1. 1 USMV's strategy involves building a portfolio of stocks whose movements neutralize each other, rather than just choosing stocks with low volatility.
  2. 2 For USMV, it's 0.15 percent in annual fees; for SPLV, it's 0.25 percent.