"Low Vol" ETF Inflows Underscore Rally's Risk-Off Nature

When it comes to sector ETFs, the proof is in the proverbial pudding regarding the risk off tenor of the rally in U.S. equities. Through April 1, the average year-to-date return for the low beta trio comprised of the Consumer Staples Select Sector SPDR XLP, the Health Care Select Sector SPDR XLV and the Utilities Select Sector SPDR XLU was 14.2 percent compared to a10.5 percent gain for the SPDR S&P 500 SPY. Overt bullishness towards those ETFs and rival funds while materials lag underscores the notion that investors have preferred more docile fare as a means of getting exposure to equities. There is further confirmation of that as minimum volatility exchange traded products attracted $4.1 billion in new investments in the first quarter. During the quarter, low or minimum volatility ETPs raked in an average of $1.4 billion per month, more than triple the average monthly inflow of $416 million seen in 2012, according to iShares data. Of course past performance is not an indicator of future returns, but the recent gains by some of the marquee U.S.-listed "low vol" ETFs could be a sign that investors will continue to embrace these funds over riskier products. Through April 1, the iShares MSCI USA Minimum Volatility Index Fund USMV was up 13 percent year-to-date while the PowerShares S&P 500 Low Volatility Portfolio SPLV was up 12.8 percent. Obviously, those are two performances well in excess of SPY's. To that end, it is not surprising that SPLV, the king of low volatility ETFs, has raked in $840.4 million in new assets this year, making it the second-best PowerShares ETF in 2013 in terms of inflows, according to issuer data. USMV attracted $1.68 billion in new assets in the first quarter, an inflow tally that ranks seventh among all the ETFs in the world for the first three months of 2013, according to iShares data. Combined, SPLV and USMV now have nearly $7 billion in assets under management. With investors favoring staples and health care names, it is easy to see why they have embraced SPLV and USMV. The iShares offering allocates more than 33 percent of its combined weight to those two sectors. So does SPLV, though that ETF's largest sector weight is 30.9 percent to utilities. Low volatility ETFs also continue to show their mettle at the emerging markets level. The iShares MSCI Emerging Markets Index Fund EEM is down 4.6 percent year-to-date. Compared to that, the 0.2 percent loss for both the iShares MSCI Emerging Markets Minimum Volatility Index Fund EEMV and the PowerShares S&P Emerging Markets Low Volatility Portfolio EELV looks pretty good. EEMV now has almost $1.8 billion in AUM, up from $1.6 billion in late February. EELV has attracted $40.2 million in new capital this year, bringing its AUM total to $129.2 million. Like their U.S. equivalents, EELV and EEMV are heavy on conservative sectors. Staples, telecom and utilities combine for over a third of EELV's weight. Same goes for EEMV, indicating that regardless of where investors put money to work this year, U.S. or emerging markets, low beta/minimum volatility is a preferred asset allocation strategy. For more on ETFs, click here.