Bloomberg is reporting today that investors in exchange-traded funds that are designed to limit the effect of U.S. stock swings may find that they magnify the moves instead.
The attached chart illustrates this by comparing the PowerShares Standard & Poor?s 500 Low Volatility ETF with the iShares S&P 500 ETF, based on 30-day volatility readings. The PowerShares fund tracks an index of 100 stocks in the S&P 500 that fluctuated the least in the last 12 months.
Volatility in the PowerShares ETF has been higher each day since Feb. 27, according to data compiled by Bloomberg. The gap peaked on March 18 at 2.44 percentage points, the widest since shares started trading in 2011. As of yesterday?s close, the differential was 1.76 points.
Differences in composition might explain the PowerShares ETF?s greater volatility, Rawson said. The low-volatility fund doesn?t own any energy stocks, which amount to 8.2 percent of the iShares ETF. Thirty-day volatility in the S&P 500 Energy Index was 24 percent lower yesterday than at the end of February, data compiled by Bloomberg shows.
Volatility comparisons also reflect the criteria for the ETFs, he said. The analyst cited the iShares MSCI USA Minimum Volatility ETF, which sets limits on industry-group holdings.
Financial companies, utilities and the makers of consumer staples, which amount to 68 percent of the PowerShares ETF, are only 38 percent of the iShares MSCI fund. Its 30-day volatility reading as of yesterday stood at 12.83 percent, compared with 14.37 percent for the PowerShares fund and 12.61 percent for iShares? S&P 500 fund.