Factor investing continues to be a popular theme in the exchange-traded fund world, and the current single-factor flavor of the month is ETFs comprised of stocks with low volatility.
Generally, factor investing picks stocks with similar characteristics that have shown to produce higher returns over time, such as investing in high-quality stocks or investing in small-cap stocks over large caps. Low-volatility ETFs group stocks that traditionally exhibit fewer price swings than the broader market over time and usually have higher yields.
One of the perceived benefits of low-volatility investing is that during times of big price swings and steep falls in valuation these investments have limited losses, although the vast majority of these have never been tested in real bear markets such as 2008.
The low-vol craze has been fueled by seemingly relentless market volatility. This year alone has been buffeted by the first-quarter swoon in the broader markets, the post-Brexit tumult after the U.K. voted to leave the European Union, concerns over China’s economy, or any number of other headline risks.
“Investors who are looking to sleep better at night were really drawn to these strategies,” says David Mazza, head of ETF and mutual fund research at State Street Global Advisors.
Many low-vol ETFs hold names that investors equate with stability, such as General Mills, Johnson & Johnson and Procter & Gamble, says Todd Rosenbluth, ETF and mutual funds research director at S&P Global Market Intelligence.
Michael Krause, president of ETF Research Center, says he counted 32 ETFs using the keywords “low volatility,” not including leveraged ETFs, while ETFdb.com counts 44 such funds. Regardless of the final number, the top three—iShares Edge MSCI Min Vol USA ETF (USMV), iShares Edge MSCI Min Vol EAFE ETF (EFAV) and PowerShares S&P 500 Low Volatility Portfolio (SPLV)—hold 70 percent of all assets under management for this category, which Krause estimates at around $45 billion.
Research from State Street Global Advisors suggests this strategy gathered about $16.05 billion year-to-date globally, up sharply from 2015’s inflows of $10.89 billion. Of this year’s total, about $6.8 billion went to domestic low-volatility ETFs.
Performance is strong. Several of the biggest low-volatility ETFs based on assets under management sport year-to-date returns between 8 and 12 percent, versus the S&P 500 year-to-date return of about 6.47 percent and the MSCI World Index return of 3.66 percent.
With numbers like that, it’s easy to see why investors want a piece of the action. But is the trade getting crowded?