INCLINE VILLAGE, Nev. - Watching the flow of money into and out of Exchange-Traded Funds (ETFs) says a lot about investor psychology. In previous years there was a flow into bond funds. More recently there was a mass exodus out of gold funds. Now, money is going into "low volatility" ETFs.iShares, the biggest ETF player, announced that its four low volatility ETFs have gathered over $4 billion in assets. Other ETF providers are taking note. State Street Global Advisors and PowerShares recently introduced their own low volatility ETFs.What exactly are low volatility ETFs? They are equity funds that are designed to only hold stocks with below average volatility. For example, the PowerShares S&P 500 Low Volatility Portfolio (SPLV) holds the 100 stocks within the S&P 500 that exhibited the lowest volatility over the previous year. These funds are helping nervous investors reenter the stock market.Just because the funds say "low volatility" doesn't mean they are risk-free, however. These are equity funds and they'll rise and fall with the overall stock market. They tend to overweight certain sectors (drug, telecomm, financial, utilities), which reduces diversification.The marketing department did well by calling these funds "low volatility." This name helps investor comfort. In my view, however, these funds are the same as dividend ETFs. Low volatility funds and dividend funds typically hold the same securities because dividend paying companies tend to exhibit lower volatility. Low volatility ETFs are new but over time I expect we'll see a high correlation between these two categories. Whether you buy low volatility or high dividend ETFs, you should do well. That's because those in need of income are moving to dividend-paying stocks. Large-cap dividend paying stocks are in the sweet spot. This is the theme today, and it will be the theme as we move forward.- David Vomund is an Incline Village-based fee-only money manager. Information is found at www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
March 4, 2013 | Back to: News