An Overlooked Alternative For Low Volatility Fans

Among the various, widely followed factors — size, value, high yield, low volatility, quality and momentum — there is no doubt that low volatility is this year's king. Flows data support that assertion as U.S. equity low volatility strategies, such as the iShares Edge MSCI Min Vol USA ETF (iShares Trust USMV) and the PowerShares S&P 500 Low Volatility Portfolio (PowerShares Exchange-Traded Fund Trust II SPLV), have been packing on assets.

The (Low) Volatility Factor

As is almost always the case with specific ETF trades when they become hot, there has been a growing cacophony from low volatility naysayers who are saying the trade is either too crowded, too expensive or both. Then again, when factoring in macro events such as Brexit, China's slowing economy and scant S&P 50 earnings growth, it is not surprising that investors are bidding up low volatility fare.

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“These conditions are playing into low volatility’s perceived strength. Not only do these strategies attempt to deliver lower volatility, but they also often provide better risk-adjusted returns and better returns than traditional market cap weighted indices,” said State Street Vice President David Mazza in a recent note. “This low volatility anomaly goes against the conventional wisdom that says it is only possible to achieve high returns by taking on higher levels of risk.”

An idea for investors looking for alternatives to traditional low volatility strategies is the SPDR MSCI World Strategic Factors ETF (SPDR Index Shares Fund QWLD), which tracks the MSCI World Factor Mix A-Series Index.

Digging Into QWLD

QWLD is not a dedicated low volatility ETF, which can help ameliorate some of the concerns about that factor being expensive and a crowded trade. Actually, QWLD is a multi-factor ETF featuring exposure to the low volatility, quality and value factors.

Due to the fact that it is not a dedicated low volatility ETF, QWLD does not feature some of the sector hallmarks that investors are accustomed with such strategies. For example, QWLD's utilities weight is just 4.4 percent and consumer staples names are merely QWLD's fourth-largest sector allocation at just over 13 percent.

Due in part to its exposure to the quality and value factors, technology (quality) and financial services (value) stocks combine for nearly a third of QWLD. Healthcare, a sector that depending on the specific stock in question can offer exposure to all three of the aforementioned factors, is QWLD's third-largest sector weight at 14.5 percent.

The “multi-factor QWLD has been able to play better defense versus a broad market-cap weighted index, and generate more offense than a single factor low volatility strategy. Since inception, QWLD has captured 95 percent of the upside versus 83 percent for a single factor minimum volatility strategy,” added Mazza.