Investors Eye Low-Volatility Funds
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Friday, July 27, 2012

Investors Eye Low-Volatility Funds

It looks like investors have their eyes set on low-volatility funds these days.

The Wall Street Journal reports that so-called low-volatility ETFs are welcoming new cash while stocks and equity mutual funds and ETFs see withdrawals.

IndexUniverse data shows that this group of only six funds has seen an inflow of $1.7 billion this year -- almost a fifth of the total new cash for the 200 U.S. ETFs linked to popular benchmarks. EPFR Global reports that US equity mutual funds and ETFs have seen a net outflow of $9 billion.

These six ETFs have been outperformers so far. For one, the PowerShares S&P 500 Low Volatility ETF rose 12 percent compared to the 2.3 percent return of the largest S&P 500-tracking ETF. This happened in the midst of a troubled market marred with slowing growth and the eurozone crisis.

But these outperformers seem to lag in broad-based rallies such as the one that took place early this year.

Scott Kubie, CLS Investments chief strategist, explained that, "In a sense, you've got a group of equities that are more risky than bonds and cash, and less risky than holding the S&P 500 and bonds."

The stocks that these funds invest in are positioned to allow them to survive or ride the downturn, not to increase growth.

Samuel Lee, Morningstar analyst, said, "The classic view is that these stocks won't make you bankrupt, but won't make you rich either."

But he adds that the recent performance of these stocks is "a bit counterintuitive because they've done a pretty good job building wealth while protecting you from volatility."

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