It’s a good question considering these funds focus on defensive sectors such as healthcare, consumer staples and real estate investment trusts that have seen big gains this year as investors seek dividend-yielding stocks in a low-interest rate environment.
The three funds above choose traditionally stable stocks, but approach indexing differently, Rosenbluth says. The iShares approach picks mostly large-cap stocks, but seeks some diversity across sectors. USMV is a domestic-focused fund and the low-vol category’s largest with $14.6 billion in AUM. It’s up 10 percent year-to-date. EFAV has a global focus, holds $8.06 billion in AUM and is up 3.2 percent
SPLV, which has $7.66 billion in AUM and is up 8.66 percent, contains 100 of the least volatile stocks within the S&P 500 index. USMV and EFAV rebalance every six months and SPLV rebalances quarterly.
“It’s logical that there is concern some of these ETFs have gotten too much attention,” Rosenbluth says. But neither Rosenbluth nor Krause believe fund flows are affecting performance.
Not only are the underlying stocks much larger than the ETFs, Krause notes, but that overall these stocks aren’t necessarily heavily owned in the ETF universe.
Mazza says he’s less worried about this being a crowded trade, considering another very popular single-factor strategy—dividend-paying ETFs—have about $115 billion in AUM. Although low-volatility ETFs are seeing big inflows, they’ve come from a low asset base so the asset flows do not indicate overcrowding.
Valuation, though, is another thing, the three researchers say. Mazza says State Street Global Advisors research shows current low-volatility factor valuations are getting to be a bit rich versus the past. However, he says the valuations aren’t as stretched as they have been during some timeframes like the global financial crisis or the European debt crisis. During those times, the low-volatility factor became expensive because investors bought up low-volatility stocks to try to reduce price swings and drawdown risk of their portfolios, which pushed up their valuations.
Rosenbluth says financial advisors and investors need to remember the purpose of these funds. “The goal of the [low-vol] ETF isn’t to outperform; it’s to be less volatile,” he says. “Advisors should be using these as a way to get equity exposure with a lower risk profile and not just picking it because it’s outperforming. Its outperformance will be fleeting.”