Low Vol

They say imitation is the sincerest form of flattery, so appreciated John Auther's piece last Wednesday “Low Vol Stocks on a Winning Streak” over at FT.com.  While Mr. Authers may share our own concerns that investors have pushed the prices for low-vol stocks to their highest price-to-earnings multiples in years with many trading at a premium to the market, investor enthusiasm has only slightly slackened in the month since our last posting on the topic. The largest domestic low-vol ETF, the Powershares S&P 500 Low Volatility (SPLV), has taken in another $379 million in new assets while the winner of the least risky ETF as ranked by our ETFG Red Diamond Risk system, iShares MSCI USA Minimum Volatility Index (USMV), pulled in nearly $200 million.  But while growing your assets by 5% - 10% is nothing to sneeze at, investors may be shifting their focus to the individual components of the funds.

While SPLV and USMV may have below average ETFG Red Diamond Risk Ratings, they also have low Green Diamond Reward scores as both have nearly 30% of their assets in Utilities or Health Care stocks trading at peak valuations. But both SPLV and USMV also share large allocations to Financials (23.5% and 11.7% respectively) and recent fund flows show large amounts moving to that sector. The biggest winner over the last month has been the iShares U.S. Financials ETF (IYF) where a nearly $700 million dollar inflow has almost doubled AUM of the fund while the larger SPDR Financial Select Sector Fund (XLF) has seen a nearly 10% increase in AUM with an inflow of 1.67 billion. Besides a smaller allocation to Berkshire Hathaway, IYF has a 5% allocation to Visa and Mastercard which aren’t part of the XLF benchmark although both are included in USMV.

Besides offering lower volatility and deviation than SPY, what else could XLF or IYF bring to the table?  Investors may be setting their eyes on how to take advantage of the first anticipated increases in the Fed Funds rate in 2015.  The financial sector has been picking up steam relative to the broader market ever since the beginning of December when Stanley Fischer first began discussing the necessity of changing the language in FOMC communications regarding interest rate increases with XLF now up .33% over the trailing month while SPY is down 1.64%.  Depending on the outcome of this Wednesday’s FOMC announcement, financials might finally be able to take-over a leadership spot in the sector rankings heading into 2015.  Investors interested in adding financial performance but with even less volatility might consider the more specific PowerShares KBW Property & Casualty Insurance Portfolio (KBWP) which currently sports a Red Diamond Risk Rating of 2.7 and offers exposure to a sector that constitutes 7.7% of USMV and 12.2% of SPLV.

For those readers who used to hold AIG or Lehman in their portfolio’s, IYF’s focus on stocks like Visa and Mastercard leads us to another sector to keep on your radar, tech stocks, which make up 13.3% of USMV.  Both the Technology Select Sector SPDR Fund (XLK) and Vanguard Information Technology Index Fund (VGT) have been gathering assets over the last month while offering less downside than SPY.  VGT has been the standout, down -.35% over the last month versus -1.54% for SPY and VGT also saw its behavioral score jump 34.38% last week, taking it to #21 on our list of top 50 ETF’s.  The devil is in the details as to why VGT has become the standout sector star; XLK has a 4.8% allocation to Verizon and 4.2% in AT&T, offering more exposure to one of this year’s worst performing sectors, telecoms.

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