Low-volatility
exchange-traded funds are a recent addition to the fund universe, providing
retail investors and advisors access to equity options that exhibit relatively
smaller swings during times of extreme market oscillations. While many have
jumped at this investment class to hedge against the recent bouts of short-term
risks, low-volatility ETFs could be a good long-term holding as well.
Advisors
have taken a hard look at low-volatility options as macroeconomic events have
weighed on the equities market. For instance, the PowerShares S&P 500 Low
Volatility Portfolio (SPLV) added about $2 billion in new assets for the year
ending November 1, 2012. Moreover, low-volatility ETFs attracted $4 billion in
inflows in the first 10 months of 2012. We witnessed Congress dragging its feet
on the U.S. debt ceiling, which prompted S&P to downgrade U.S. sovereign
debt in 2011. That was followed by a plunge in stocks. Equities were pommeled
again when the European financial crisis came to a head and default problems
loomed. Meanwhile, many investors are still recovering from fresh memories of
the 2008 financial depression.
This growing
appetite for low-volatility assets has not gone unnoticed by providers.
S&P/Dow Jones has launched the S&P MidCap 400 Low Volatility Index and
the S&P SmallCap 600 Low Volatility Index, which have both been picked up
by Invesco PowerShares. The new chief investment officer at Vanguard, Tim
Buckley, says his company is also taking a “hard look” at low-volatility ETF
offerings to help investors minimize volatility in their portfolios.
While more
advisors are now beginning to consider low-volatility ETFs as a tactical
strategy, the investment class may also serve as a long-term allocation
strategy. Over the past half century, stocks that have shown the least
volatility have performed as well as, if not better than, the overall
market—and with less risk—both internationally and domestically.
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