Billions flow into low-vol and “buffer” ETFs as markets swing

Investors are flocking toward two different ETF strategies as concerns about turbulence rise

Billions flow into low-vol and “buffer” ETFs as markets swing

With volatility featuring prominently in today’s markets and on investors’ minds, it should be no surprise that safe havens and protective strategies are getting an increasing share of people’s portfolios. That includes the US, where two such strategies are gaining in popularity.

“In the first four months of the year, funds that try to mitigate risk raised almost US$10 billion, boosting assets to a record US$77 billion, according to Morningstar Inc.,” reported the Wall Street Journal.

One notable category is low-volatility ETFs, a type of smart ETF that tries to pick the least volatile stocks. According to Factset data, Invesco S&P 500 Low Volatility ETF (SPLV) and iShares Edge MSCI Min Vol USA ETF (USMV), two of the largest such funds in the US, have raked in over US$6.4 billion combined so far this year.

The two low-volatility strategies have also performed well in the past year, with the Invesco ETF returning almost 18% and the iShares ETF gaining 16%, compared to the S&P 500 that’s returned 5.8%. On the Canadian side, Fundata figures show that two iShares strategies were among Canada’s top performers for the year ended March 31, 2019: iShares Edge MSCI Min Vol Canada Index ETF (XMV), which returned 10.49%; and iShares Edge MSCI Min Vol Global Index ETF (XMW), which gained 12.47%.

But low-vol ETFs aren’t perfect. A look under the hood of Invesco’s SPLV, for example, reveals that 25% of its US$11 billion in assets are invested in utilities, which the Journal noted are “dividend-paying stocks that tend to perform poorly when interest rates rise.” And in a past interview with WP, Chris Heakes, Director, Portfolio Manager, Exchange Traded Funds at BMO Global Asset Management, advised investors to choose products that are uncorrelated to the broader market, and that have no active caps on sector allocation.

Investors in the US have another option in a strategy newly introduced to the ETF space. Offered by Innovator ETFs, the so-called “buffer funds” use options strategies to limit losses during falls in the S&P 500, but they also cap gains when it rises. For investors concerned about protecting their nest eggs, that can be a worthwhile trade-off.

The dozen buffer ETFs in Innovator’s shelf have raised over US$364 million since the start of April, according to FactSet Data. That’s remarkable for a new idea with a relatively large price tag: according to the Journal, they cost US$79 yearly for every US$10,000 investment, which is 26 times more than the cheapest S&P 500 index ETF).

“The financial alchemy may be a bit tough to comprehend for investors used to plain-vanilla index funds,” the Journal said. Rather than being calculated from the day an investor buys their shares, the buffer is based on the level of the S&P 500 on the day the funds launched. That means an investor who buys a buffer fund when stocks have dipped below that starting level will enjoy less downside protection. In addition, investors wouldn’t see any gains until stocks rebound above the starting threshold.

Another drawback to the buffer ETFs is that they don’t offer exposure to dividend stocks. That could be a turn-off for those salivating at the S&P 500’s dividend yield, currently running at around 2% a year. But retirees or near-retirees might be willing to pay that price to protect their savings.


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