Sector Surprises In A Popular Low Vol ETF

The PowerShares S&P 500 Low Volatility Portfolio SPLV turned six years old earlier this month and is home to over $6.6 billion in assets under management. In other words, SPLV is one of the oldest and largest low volatility exchange traded funds in the U.S.

It can be argued that SPLV kick-started the low volatility ETF phenomenon in the U.S., but assumptions are often made about this fund that are not always accurate. Notably, many investors think of SPLV as a utilities ETF in disguise, but sector-level assumptions pertaining to SPLV can be misleading if investors do not know how stocks enter and exit this ETF.

Simply, SPLV tracks the S&P 500 Low Volatility Index, a benchmark that holds the 100 S&P 500 stocks with the lowest trailing 12-month volatility. There is nothing in that description about needing to maintain set exposure to specific sectors. What that means is that as stocks in some sectors become increasingly volatile and stocks in other groups become more docile, it stands to reason that SPLV's sector weights will periodically change.

Currently, SPLV allocates just over 30 percent of its combined weight to utilities and consumer staples, sectors that are often hallmarks of low volatility funds. However, neither sector is SPLV's largest sector weight. Utilities is SPLV's second-largest sector allocation while staples rank fourth. There are other sector-level surprises in SPLV.

“In the latest quarterly rebalance (effective at market close on May 19, 2017), the S&P 500 Low Volatility Index added more weight from the technology sector. The jump from 7% to 12% is the largest increase for any sector. Meanwhile, the index continued to shed weight in Consumer Staples and Utilities, historically the stalwarts of Low Volatility,” said S&P Dow Jones Indices in a recent note. 

As of May 19, SPLV's underlying index had a 12 percent weight to technology stocks, an increase of 500 basis points since February. To be precise, as of May 22, SPLV's technology weight was 11.4 percent. That makes technology SPLV's fifth-largest sector weight. While that does not sound like much, it's one of SPLV's largest tech weights in the ETF's just over six years on the market.

Believe it: Google parent Alphabet Inc. GOOG is one of SPLV's components. SPLV, which hit an all-time high Tuesday, allocates 16.9 percent to industrials, its largest sector weight.

“That Low Volatility had no weight in Technology just a year ago is also noteworthy. The index’s methodology seeks out low volatility at the stock level, but we often look to the S&P 500 sectors as a loose proxy to gather insight,” said S&P Dow Jones.