Eric Dutram: With the broad equity indexes hovering around their all-time highs, we expect the markets to become more volatile as we move further into 2013. Investors are now keeping a close watch on the market movements, waiting to see if the rally continues or subsides.
Keeping this uncertainty in mind, PowerShares, one of the world’s biggest ETFs issuers, has launched two new style funds providing investors access to low-volatility strategies. This marks its first product launch this year.
The two funds, the S&P MidCap Low Volatility Portfolio ETF (NYSEARCA:XMLV) and S&P SmallCap Low Volatility Portfolio ETF (XSLV) target the U.S. market, focusing on mid-cap and small- cap stocks respectively. The launch increases the PowerShares low volatility ETF family to five.
XMLV and XSLV in Focus
XMLV looks to track the S&P MidCap 400 Low Volatility Index, holding 80 stocks in the basket while XSLV tracks the S&P SmallCap 600 Low Volatility Index, holding 120 stocks.
Both products put less than 2% of assets in individual securities, ensuring high levels of diversification. National Retail Properties (NNN), Westar Energy (WR) and Alliant Energy (LNT) occupy the top 3 positions in the mid- cap fund while Allete (ALE), UNS Energy (UNS) and UIL Holdings (UIL) are the top 3 elements in XSLV.
Both funds are heavily skewed towards financials, closely followed by utilities. Other sectors like consumer staples, healthcare, industrials, information technology, materials and telecom make a nice mix in the portfolio.
Unsurprisingly, this structure results in a value tilt for both the products. XMLV has roughly three-fifths of its assets in mid-cap value, with just 11% going to mid-cap growth stocks. Similarly, three-fourth of XSLV focuses on small-cap value while 23% goes to growth stocks (read: Time to Consider Pure Growth and Value ETFs?).
How does it fit in a portfolio?
These products could be an interesting choice for investors seeking exposure to the U.S. mid- and small-cap equities in the currently shaky market environment. If markets remain weak in 2013, low volatility funds may prove to be safe bets for investors.
These ETFs will be the low cost choices, charging only 25 basis points a year in fees. Additionally, almost equal allocations to each of the securities could keep the portfolio balanced among the various companies, and prevent a heavy concentration.
Low volatility ETFs are mainly suitable for low risk-tolerance investors. These generate decent and often impressive returns above their higher volatility counterparts at times of market uncertainty (read: Time to Invest in Low Volatility ETFs?). This is because these funds generally include those stocks in their portfolio that have shown more stability in the past and have experienced the least movement.
Can it succeed?
There have been a good number of choices in the low volatility ETFs space. Currently, there are over 8 low volatility options on the market, although just 3 track the U.S. equities.
The most popular in the space is the PowerShares S&P 500 Low Volatility Portfolio (SPLV), which has roughly $3.4 billion in AUM. The ETF zeroes in on low volatility securities in the S&P 500, holding over 100 stocks in total and charging investors 25 basis points a year in fees for the service.
The next popular product in the space is the MSCI USA Minimum Volatility Index Fund (USMV). This ETF has amassed over $1.3 billion in assets and holds 126 securities. The fund also benefits from a cheaper fee of 15 basis points annually.
Apart from these U.S. funds, iShares MSCI Emerging Market Minimum Volatility Index fund (EEMV) also has an impressive $ 2 billion in assets, charging 25 bps in annual fees. This ETF however focuses on emerging market securities making it entirely different from the new XMLV and XSLV (see more ETFs in the Zacks ETF Center).
Investors should note that the low volatility funds have been introduced in the last 20 months or so, suggesting that the move to low volatility options is a recent development. Given this, the new ETFs from PowerShares could be jumping into a hot market, suggesting that if they can keep costs down and volatility low, they could see big inflows and solid investor interest.