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High and Low Volatility ETPs

Wed, Dec 14, 1:11 PM ET, by Bill Luby

Since Barclays/iShares launched the first VIX-based exchange-traded products (ETPs) three years ago next month, the landscape of volatility ETPs has been dominated by products that are based on VIX futures. This should come as no surprise to investors, since the cash VIX (or VIX index quoted on CNBC and elsewhere) cannot be traded directly.

In early May, however, PowerShares elected to go in a different direction and launched the PowerShares S&P 500 Low Volatility Portfolio (SPLV) on one end of the spectrum and the PowerShares S&P 500 High Beta Portfolio (SPHB) at the more volatile end of the spectrum. [I'm guessing that a "High Volatility" moniker didn't make it very far with either the legal or marketing folks"]

Three weeks after the PowerShares products, Russell Investments peppered the market with a launch of ten different "factor ETFs" which also address investor demand for products with high and low volatility, beta, momentum, etc. over the Russell 2000 and Russell 1000 universe, later followed by three international variants. Since then, several other issuers have entered the market with similar products.

By far the products that have received the most attention from investors have been the low volatility ETPs, with SPLV leading the pack with a market share of around 80%.

So far these volatility/beta ETPs have attracted approximately $800 million in assets, about 1/3 of the amount that is invested in VIX-based ETPs.

While the low volatility products have performed quite well since their launch and I understand the visceral desire to hold low volatility products in a high volatility world, as I see it, holding low beta stocks (SPLV top holdings) is just another way at market timing and not necessarily better over the long haul than diversifying with bonds or even more cash.

Going forward, I will spend some time analyzing the performance of SPLV, SPHB and some other ETPs in the volatility/beta group. In the meantime, give some thought to the possibility that even though utilities (XLU) have been superb performers in 2011, these are not necessarily the best long-term investments for most of us.

Disclosure(s): none



SDI Glossary: "Beta" Definition
SDI Glossary: "ETFs" Definition
SDI Glossary: "iShares" Definition
SDI Glossary: "VIX" Definition
This Article's Word Cloud:   Barclays   ETPs   High   Portfolio   PowerShares   Russell   SPHB   SPLV   Since   Three   Volatility   address   around   attention   based   been   beta   cash   different   entered   even   forward   have   high   investors   launch   launched   long   market   moniker   more   most   necessarily   none   other   over   performers   products   since   some   spectrum   superb   that   these   three   traded   universe   volatility   weeks   with

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