PowerShares, the firm behind the incredibly popular S&P 500 Low Volatility Portfolio (SPLV) has added two more products that employ a similar methodology in international stock markets. The new ETFs, the first launched by PowerShares in 2012, include [for analysis of all new ETFs, sign up for the free ETFdb newsletter]:
- PowerShares S&P Emerging Markets Low Volatility Portfolio (EELV): Linked to the S&P BMI Emerging Markets Low Volatility Index, this ETF consists of 200 of the least volatile stocks over the past 12 months.
- PowerShares S&P International Developed Low Volatility Portfolio (IDLV): This ETF offers exposure to 200 stocks from developed markets outside the U.S. that have exhibited the lowest volatility over the last 12 months.
Low Volatility ETFs In Focus
PowerShares’ SPLV was one of the most successful new ETFs to launch in 2011; since debuting in May of last year, the fund’s AUM has grown to nearly $1 billion. The investment thesis behind SPLV and the new additions to the low volatility suite of ETFs is relatively simple; by identifying stocks from a larger universe that have historically exhibited the lowest volatility, investors can smooth out the ups and downs of their portfolio and limit downside exposure in bear markets. Perhaps the best illustration of this feature is provided by examining the performance of SPLV relative to the S&P 500 SPDR (SPY), which is linked to the broader index from which SPLV selects its holdings. When U.S. stocks dropped sharply in August of 2011, SPLV’s downside was far less than SPY. As a result of its ability to preserve value during tumultuous times, SPLV has beaten SPY by a wide margin since its launch:
Besides the argument that focusing on low volatility stocks leads to better long-term returns by limiting losses during rough patches, low volatility ETFs can also be viewed as a tactical tool to scale back risk without completely getting out of stocks. Think of it as a less drastic move to safety than shifting assets to cash or bonds; low volatility stocks represent a way to reduce overall risk while still maintaining upside potential in the form of equity exposure.
Strategies revolving around positions in low volatility stocks are, of course, nothing new. But the combination of low volatility investing with the ETF wrapper is a relatively recent innovation–and one that has attracted huge amounts of cash from investors. In recent months various issuers have rolled out low volatility ETFs, including products targeting emerging markets (EEMV), small cap stocks (SLVY), and even a global stock low volatility ETF (ACWV). Aggregate assets in low volatility ETFs now total about $1.1 billion, the lion’s share of which is in SPLV.
Under The Hood: EELV
EELV maintains a portfolio that is unique in several ways from many of the other emerging markets ETFs on the market. This ETF has a significant amount of exposure to mid cap stocks, allocating close to 50% of its portfolio to that bucket. And the country breakdown is perhaps a bit surprising as well; the largest weightings are afforded to Malaysia (24%), South Africa (18%), and Taiwan (12%). EELV is light on exposure to the BRIC bloc; Brazil represents about 9% of the fund, but there is little in the way of exposure to China or India.
From a sector perspective, EELV has a tilt towards financials (24%), consumer staples (15%), utilities (14%), and telecom (11%). The big weighting towards financials may seem strange in a low volatility product, considering that U.S. financials stocks have exhibited tremendous volatility over the last several years. That highlights the difference between banks in emerging markets and financial institutions in the developed world; in the emerging markets, financials stocks tend to focus on core banking operations such as taking deposits and lending money–there is less of a focus on complex securities lending and other sophisticated financial instruments. With the swelling middle class providing a steady stream of new customers, emerging markets banks are actually very stable stocks. That is in sharp contrast to the U.S.; SPLV, which holds, stocks from the S&P 500, has a weighting of less than 3% to financials.
According to the PowerShares Web site, the largest individual holding in EELV at launch was another ETF: the Global X FTSE Colombia 20 ETF (GXG). EELV charges a net expense ratio of 0.29%, which is well below the average for the Emerging Markets ETFdb Category of 0.66%.
Under The Hood: IDLV
IDLV has a bit more of a large cap tilt, though this fund also includes a meaningful allocation to mid cap stocks. Canada (20%) takes the top spot from a country allocation perspective, followed by Japan (17%), the U.K. (11%), and Singapore (11%). IDLV also features exposure to a number of other developed economies, including Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, and Switzerland.
The largest sector allocations in IDLV are towards financials (22%), consumer staples (18%), and industrials (14%). The financial allocation includes a number of Canadian banks, which are generally more stable than their U.S. counterparts.
Disclosure: No positions at time of writing.