August 29th, 2012 by

Low-Volatility ETF Demand Fueled by Desire for Safety by Tom Lydon

Despite the diminished volatility in the equities markets and the growing complacency in the current rally, wary investors have sought out alternative investment strategies, like low-volatility exchange traded funds, to hedge potential risks.

With the Knight algorithm induced flash crash, looming Eurozone crisis and presidential elections weighing on the minds of investors, many are keeping cautious with their investments, writes Dave Goodboy, V.P. of marketing for intrendX LLC, for Street Authority.

Meanwhile, the CBOE Volatility Index, or VIX – a widely viewed gauge for market volatility or risk – has been hovering around multiyear lows, and the S&P 500 is touching on its 4-year high.

As many investors remain cautious with their investments, some have come to expect a spike in volatility sooner rather than later.

“Remember, stocks are driven by perception,” Goodboy noted.

Since investors believe the negatives will overwhelm the markets, low-volatility ETFs remain popular hedging tools.

For example, the most popular and largest low-volatility ETF is the PowerShares S&P 500 Low Volatility ETF (NYSEArca: SPLV). SPLV has a 0.25% expense ratio and a 2.96% yield. It’s top holdings include safe name brands like Southern Co. 1.5%, Kimberly-Clark 1.4%, General Mills 1.4%, Campbell Soup 1.3% and Procter & Gamble 1.3%. The fund also leans toward defensive sectors, with consumer staples at 31.1%, utilities at 29.0% and health care at 14.2%. [Some Overlooked Low-Volatility ETFs]

However, potential investors should note that SPLV is not designed to beat the broad market. Low-volatility ETFs help mitigate the swings during sharp market turns, but in a bullish rally, the ETFs tend to underperform the overall markets. For instance, SPLV has only gained 5.6% over the last three-months, compared to the 7.6% increase in the S&P 500.

Max Chen contributed to this article.

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