There is a saying in fashion circles that “If you wore a trend the first time it was fashionable, you’re too old to wear it when it comes back into vogue”.Since I have the fashion sense of a middle-aged rhino, this makes little sense to me. But apparently it is a thing…
Thankfully the same does not apply to investment styles, and I can remember like it was yesterday buying my first “minimum volatility” US equity fund in 2012 just after it launched. The two most popular at the time were an iShares offering (USMV) and an Invesco product (SPLV). The former hews closely to S&P 500 sector weightings, but owns less choppy names; the latter simply picks the 100 least volatile names in the S&P.
Given all the recent US equity volatility, it would seem “min vol” is about to come back into fashion. Money flow data from www.xtf.com shows that is the case. In the last week min vol US equity funds have picked up $526 million of fresh capital, over 25% of all the money they have raised for 2018 YTD. Performance has been good, on average, with the typical fund down less than the S&P 500 over the last month.
The two largest US equity min vol funds are those early-adopter products mentioned above:
#1. USMV (iShares MSCI Min Vol): $16.8 billion in assets.
- Down 1.1% over the last week (S&P 500 down 2.5%)
- Down 4.4% over the last month (S&P down 6.5%)
- Up 0.9% over the last 3 months (S&P down 2.8%)
- Up 4.3% YTD (S&P up 2.5%)
- Largest 5 holdings (all less than 2%): Pfizer, Visa, McDonald’s, Johnson & Johnson, Waste Management
- Largest sector weightings: Technology (21%), Health Care (15%), and Consumer Staples (11%)
#2. SPLV (Invesco S&P 500 Low Volatility): $7.3 billion in assets.
- Down 1.0% over the last week
- Down 4.8% in the last month
- Down 0.5% in the last 3 months
- Up 0.3% YTD
- Largest holdings (all less than 1.5%): Coca-Cola, Duke Energy, WEC Energy, Proctor & Gamble, and CMS Energy
- Largest sector weightings: Utilities (23%), Real Estate (17%), and Financials (17%)
The bottom line here is that both funds have worked as designed during the recent volatility, losing less than the S&P 500. USMV is better YTD, but SPLV may catch up if rate sensitive names (Utilities and Real Estate) continue to work.
The same is not so true for two other common risk-management strategies: covered call writing and hedge fund replication (130/30 long-short funds).The numbers:
- There are 2 covered call ETFs with AUM over $250 million: QYLD (NASDAQ 100 covered calls), and PBP (S&P 500 BuyWrite).
- QYLD has outperformed the NASDAQ 100 over the week/month/quarter by losing less, but is down 1.9% on the year versus the 11.6% gain for the index.
- PBP has lost more the than S&P 500 over the last month and quarter, and is down 0.1% on the year versus the S&P’s 2.5% gain.
- There are 2 hedged US equity ETFs with AUM over $100 million: CSM (Proshares Large Cap Core Plus) and DYLS (WisdomTree Dynamic Long/Short US equity).
- CSM has underperformed the S&P 500 over the last week/month/quarter. It is +0.9% on the year versus the 500’s 2.5% gain.
- DYLS is better than the S&P over the last quarter, but behind the S&P for the week, month and YTD.
Lastly, we need to touch on the most controversial US equity hedge out there: the VXX ETF, linked to the CBOE VIX Index on a daily reset basis and with $1.0 billion in assets under management. Despite its well-documented perils, VXX is:
- +12.2% over the last week
- +34.4% over the last month
- +17.3% over the last quarter
- +28.5% YTD
- Worth noting: despite this performance, money flows have been consistently negative over these holding horizons.
Bottom line here: min vol strategies have worked much better than covered call or hedge fund-style long/short, and with none of the inherent riskiness of VXX. That means this style is pulling in significant money flows, which partly explains the Consumer Staples/Tech performance difference we highlighted last week. As long as US equities remain volatile, we expect this strategy to continue to attract assets. And help the stock prices of less volatile names.
Who says you can’t wear the same style twice in your lifetime?