While it is somewhat more diversified than the PowerShares fund, Russell 1000 Low Volatility has 46% of its assets in utilities and defensive consumer stocks. Holdings include AT&T (T - Get Report) and power producer Duke Energy (DUK - Get Report).
The industry concentrations help to explain why the low-volatility strategies have outpaced the market during the past 10 years. In the downturns of the financial crisis, utilities and consumer stocks proved relatively resilient. But before you rush to put all your money in a low-volatility fund, keep in mind that the strategy does not excel all the time. During the 1990s bull market, low-volatility stocks lagged, while high-volatility technology stocks led the parade. "The main point of a low-volatility fund is not to outperform the market," says David Koenig, an investment strategist at Russell. "The point is to provide a portfolio that has low volatility in difficult markets."
Koenig says that some cautious investors may want to hold a low-volatility fund as a core holding. More aggressive investors may decide to take a small position in one of the funds as a means to diversify portfolios. Another option could be to pair Russell 1000 Low Volatility with a choice such as Russell 1000 High Volatility (HVOL), which has 21% of assets in technology and less than 1% in utilities. Because they have different sector allocations, the two volatility funds could provide diversification.
Morningstar analyst Samuel Lee recommends iShares MSCI Emerging Markets Minimum Volatility Index (EEMV). The fund charges a low expense ratio of 0.25%. The low-volatility fund can be especially appealing because the emerging markets have often recorded big swings. "Over the long sweep of time, a low-volatility fund could post better risk-adjusted returns," Lee says.