In One Chart - September 24, 2019
In One Chart: How is Ezekiel Elliott like a Low Vol ETF?
Low Volatility ETFs are the Ezekiel Elliott of exchange traded funds — both have seen huge inflows of cash in 2019, and both have been outperforming.
Ezekiel “Zeke” Elliott, who plays for the Dallas Cowboys, became the highest paid running back in the NFL when he signed a contract extension worth $90 million over six years. That extension brought Zeke’s total contract value to $103 million.
Similarly, the ten largest Low Volatility ETFs have seen year-to-date inflows of more than $20 billion, even as equity ETFs as a category have shown net outflows as investors grow wary of an economic downturn and shift assets to fixed income funds.
When it comes to performance, Zeke Elliott has been one of, if not the best ball carriers in pro football. Averaging 4.7 yards per carry and 100.3 yards per game, Zeke has amassed 30 career touchdowns and earned the NFL rushing yards title in two out of three full seasons he’s been in the league.
Back to Low Vol ETFs, they’ve outperformed the market in 2019 in terms of both risk and return. The chart below shows iShares Edge MSCI Min Vol USA ETF (USMV), which holds U.S. stocks that, in the aggregate, have lower volatility relative to the broader U.S. equity market, versus SPY, OEF, and VTI, all of which track either the total U.S. equity market or the largest U.S. equities.
USMV succeeds at both outperforming the total market funds, and minimizing its standard deviation of monthly returns.
What else do you need to know about low or minimum volatility ETFs? And why have they done so well in 2019?
Firstly, low and minimum volatility ETFs are used primarily by more conservative investors who are seeking downside protection. By selecting equities with less volatility, these funds limit drawdowns while still providing upside potential, and thus may have better risk-adjusted returns than total market funds.
Because slightly more work goes into constructing and maintaining these funds, minimum and low volatility ETFs have expense ratios slightly higher than total market ETFs; for example, USMV’s expense ratio is 0.15% while SPY’s expense ratio is just 0.09% — an argument could be made that the additional 10% of total return since January ‘18, as seen in the chart above, considerably moves the “performance net of fees” needle.
ETFs that manage volatility have outperformed the broader market in 2019 likely because of trade tensions between the United States and China — investors are seeking a safe haven from volatility.
The Cowboys fulfilled Zeke’s request for a new contract after a 41 day standoff, but the world’s two largest economies have been talking tariffs since July 2017. As long as he stays healthy, Zeke appears to be an outperforming back. In the same way, as long as market volatility fueled by tough rhetoric around tariffs persists, low volatility ETFs may outperform.