Do Low Volatility ETFs Live Up to Their Hype?
Low volatility ETFs have become the rage lately. Powershares started the fad back in May of 2011 with their S&P 500 Low Volatility ETF (SPLV). The SPLV invests in the 100 stocks within the S&P 500 that have had the lowest volatility during the last 12 months.
IShares jumped on the bandwagon in October 2011 by launching the MSCI USA Minimum Volatility Index Fund (USMV) which selects 124 low volatility securities from the MSCI USA Index.
Do these ETF live up to their hype?
To answer this, I calculated the total return and volatility of each of these ETFs and compared them to the S&P 500. I used the period from October 2011 to the present. The results are shown below:
SPY: Total Return: 20%, Volatility: 14.8%
SPLV: Total Return: 19.7%, Volatility: 10.2%
USMV: Total Return: 19.8%, Volatility: 9.9%
As you can see, these ETFs did deliver their objective of lower volatility with only a small reduction in total return. To compare these ETFs, I divided the Total Return by the Volatility to obtain a measure of the Reward-to-Risk ratio. The results are summarized as:
SPY: Reward-to-Risk: 1.3
SPLV: Reward-to-Risk: 1.9
USMV: Reward-to-Risk: 2.0
The Low Volatility ETFs do in fact live up to their hype by delivering lower volatility with a higher Reward-to-Risk ratio. No wonder they are becoming so popular.