Large Cap Low Volatility ETFs Deliver On Objective But Achieve Unexpected Returns

The recent correction in equities and the rapid subsequent rebound have reminded investors of the need to limit risk in the pursuit of return. In response to the desire for less volatility, nearly a dozen ETFs focused on low volatility have hit the marketplace. The largest - the PowerShares S&P 500 Low Volatility Portfolio ETF (NYSEARCA:SPLV) - has just short of $4.5B in assets under management.

 

The objective of low volatility ETFs is not necessarily to match the return of the S&P 500 but to provide broad market exposure to companies that have demonstrated the lowest realized volatility over the prior 12 month period. The basic risk and return relationship would tell us that as risk is reduced return potential is also decreased. But this year, the PowerShares Low Volatility ETF has not only delivered on its objective of lower risk but has strangely also delivered market beating returns.

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