By: David Fabian, Special NASDAQ OMX Global Index Watch Contributor
The first low volatility exchange-traded fund was released in 2011 as the PowerShares S&P 500 Low Volatility Portfolio (SPLV). This ETF quickly garnered billions of dollars in assets as investors sought to diversify their portfolios with a unique equity index strategy that is designed to select stocks with lower price fluctuations. The success of this product quickly led to additional offerings from both PowerShares and iShares in emerging market, international, global, and small/mid-cap stocks.
The basis behind the strategy for these funds is to take the underlying S&P or MSCI indexes and identify a subset of stocks (typically 80-200) that have the lowest price volatility for the last quarter. What you are left with is a unique portfolio of equities that typically have very steady returns and stable price movement. The make-up of low volatility funds is commonly focused in the areas of consumer staples, utilities, financial, and health care sectors. One additional benefit to a concentrated mix of stocks in these defensive sectors is the above average yield. However, the asset allocation can vary depending on the region or market capitalization of the underlying index.
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