Ditch The Risk, Reap Rewards With This ETF

The prosperity of low volatility exchange-traded funds has been well-documented this year and with good reason. Put simply, in a market environment that has been far from sanguine, ETFs such as the PowerShares S&P 500 Low Volatility Portfolio (PowerShares Exchange-Traded Fund Trust II SPLV) have done their jobs.

While the returns are not jaw-dropping, SPLV, one of the largest low volatility ETFs, is up 1.1 percent year-to-date, while the S&P 500 is down more than 2 percent. SPLV, which celebrates its fifth anniversary in May, is comprised of the 100 S&P 500 members with the lowest trailing 12-month volatility.

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As an investment factor, low volatility, like other factors, has its critics. The most frequent criticism being that although ETFs like SPLV help investors skirt volatility, investors risk “leaving something on the table” during overt bull markets.

“The goal of SPLV’s underlying methodology is to provide investors with partial upside market participation and downside risk mitigation. What does this mean? SPLV’s index is designed to overweight low volatility stocks versus the broader equity market. Because of that, we expect this strategy to potentially provide a portion of the market’s upside in rising markets, but also less downside capture when stocks are falling,” said PowerShares, the fourth-largest U.S. ETF issuer, in a new note.

A Closer Look Into SPLV

SPLV's current sector allocations may surprise some investors. No, it is not stunning that consumer staples at almost 22.7 percent are the ETF's largest sector weight. However, it might be a surprise to some that financial services at 21.6 percent and industrials at 16.7 percent figure more prominently in SPLV's than do utilities at 13.9 percent. In fact, utilities risk ceding the fourth spot in SPLV's lineup to healthcare, which is less than 20 basis points behind.

No stock accounts for more than 1.29 percent of SPLV's lineup. Top 10 holdings include The Coca-Cola Co KO, AT&T Inc. T and General Mills, Inc. GIS.

“SPLV has the added advantage of an unconstrained investment approach. Unlike portfolios that make use of minimum-variance constraints, the S&P Low Volatility Index has the ability to rotate in and out of sectors as volatility dictates through the process of quarterly rebalancing. Below are two examples of unconstrained sector allocation in recent years,” added PowerShares.

While calling SPLV “dynamic” in terms of sector treatment could be overstating things, “flexible” is accurate. As the issuer notes, once upon time, utilities accounted for nearly a third of the fund's weight. The sector has also been as light in SPLV as 3 percent.

Disclosure: Todd Shriber owns shares of General Mills.