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 index 1 USMV's strategy involves building a portfolio of stocks whose movements neutralize each other, rather than just choosing stocks with low volatility. . 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. 

Low Vol

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 ratios 2 For USMV, it's 0.15 percent in annual fees; for SPLV, it's 0.25 percent. , 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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