Low-volatility exchanged-traded funds (ETFs) have surged in popularity, according to Reuters (they’ve surged by $2 billion since the beginning of the year). With the CBOE Volatility Index (VIX) jumping all over the place, it’s easy to understand why investors want to protect their portfolios from the downside.
But while there has been much ado about low-volatility investors pushing up the price of stocks that fit the bill, there has been less discussion of exactly how such low-volatility products actually carry out their mission.
Compare the performance of low-volatility ETFs, however, and you can see that not all of them are going about it the same way. As Reuters points out, a lot of low-volatility ETFs are making sector bets—and their performance can diverge markedly.
As the article points out, some are heavily weighted in a couple of industries while are designed to limit sector exposure and diversify across mid- and large-cap equities. But some ETFs don’t rebalance often, which reduces costs, but means investors could get stuck in securities that are becoming increasingly volatile.
Others might focus on momentum and liquidity.
The big differentiator, however, is in performance: as Reuters points out, they can vary widely, depending on the approach taken.
You can read the article here.
In the meantime, as ETFs shift away from their passive-only roots and begin to nudge into active territory, investors will need to look carefully at how they select a particular product. They’ll need to dig under the surface and carefully examine the factor tilts being used and—in some cases—how the underlying index is constructed.
Clearly not all low-volatility products are created the same way—investors need to understand what they’re buying, and whether there are any unintended risks in the package.