Tag Archives: low volatility

Low Volatility ETFs

The hip new financial product fangirled by every personal finance columnist on the internet is the low volatility ETF.  It is pretty much exactly what it sounds like – an ETF that, while tracking whichever index/industry/etc. it is supposed to, attempts to limit the variability of returns.  You can think of it as a stock with a low beta that moves with the trend of the market but not as severely in either direction during business cycle booms and busts.   Methodologies vary, but techniques are employed to limit the variance of individual holdings as well as the correlation between them.  I analyzed the performance of the PowerShares Low Volatility S&P 500 ETF (SPLV) to see how it stacks up against the market as a whole.

Over the past four years, the S&P500 had both a significantly higher maximum and lower minimum return compared to the PowerShares Low Volatility Index.  The S&P experienced many more extreme returns (+/- 1% daily return), suggesting that returns on SPLV fluctuate less than the market.  The S&P also earned a lower average return with higher variance than SPLV.

Period 5/6/11 to 1/6/15

S&P 500 SPLV
Max Daily Return 4.63% 3.75%
Min Daily Return -6.90% -5.18%
Returns less than -1% 98 62
Returns greater than 1% 110 71
Average Daily Return 0.04% 0.06%
Average Annual Return 0.99% 0.75%
Standard Deviation of Daily Return 10.98% 14.03%
Standard Deviation of Annual Return 15.71% 11.85%

The table below is the same analysis for only the year 2014, during which the US equity market posted more gains.

Year 2014

S&P 500 SPLV
Max Daily Return 2.37% 2.00%
Min Daily Return -2.31% -1.99%
Returns less than -1% 19 14
Returns greater than 1% 19 13
Average Daily Return 0.04% 0.06%
Average Annual Return 0.72% 0.60%
Standard Deviation of Daily Return 10.70% 15.80%
Standard Deviation of Annual Return 11.34% 9.55%

The claim that the PowerShares Low Volatility ETF (SPLV) tracks the S&P with less variability in returns  is corroborated by this simple analysis.  The graph of daily close prices and trading volume below also seems to corroborate this – the S&P500 Index (Yellow) fluctuates around the steady-ish path followed by SPLV (Blue).  The ETF misses out on some gains during the summer months, but outperforms later in the year.

Untitled picture2

Interestingly, the fund achieves its low volatility by being overweight in Healthcare and Financials, not the quintessentially low-risk sectors like Telecom or Utilities.

Sector_Breakdown

 


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