A Non-Traditional ETF for a Choppy Market

NEW YORK (TheStreet) -- The ETF industry has taken off in a major way in the decades following the launch of the SPDR S&P 500 ETF (SPY).

According to the October fund flow data compiled by the National Stock Exchange, total ETF assets managed to break through the $1 trillion mark heading into last month. As of the start of November, over 1,100 individual products were actively trading.

The vast majority of these products utilize traditional indexing methods in order to provide investors with exposure to specific segments of the global economy. However, given the sheer volume of funds out there, it is understandable that finding previously untapped market regions has become difficult. Increasingly, fund companies have opted to turn to alternative methods to gain market share.

In many instances, these non-traditional products have struggled to gather steam. However, a handful of alternative strategy funds have gathered a surprisingly devout following. The PowerShares S&P 500 Low Volatility Portfolio ( SPLV), for example, currently boasts an average trading volume of over 500,000. This instrument's success appears to be an example of perfect timing.

The first of its kind, the SPLV is a unique, style-focused fund designed for investors looking to effectively weather a rollercoaster market environment. According to the fund's website, SPLV's index is comprised of the 100 S&P listed stocks boasting the lowest relative volatility over the past year period.

Top holdings include familiar non-cyclical giants including Southern Co. ( SO), Procter & Gamble ( PG), Pepsi ( PEP) and Wal-Mart ( WMT). The fund's index is relatively evenly weighted, with none of its 10 largest constituents representing more than a 1.7% slice of its assets.

This type of low volatility-focused investing strategy has held up during the choppy second half of 2011. As the European sovereign debt crisis has heated up and cast the global markets under a cloud of uncertainty, the broad-based SPY has dipped 8.0%. SPLV, on the other hand, has managed to navigate the rough waters relatively well, dipping less than 2.5% since the start of June.

Other fund sponsors appear to have noticed SPLV's standout success and appeal in the face of looming macroeconomic headwinds. During the autumn months, both Blackrock ( BLK) and Russell have come to market with similarly styled ETF products. The newcomers, which include the Russell Developed ex-U.S. Low Volatility ETF ( XLVO) and the iShares MSCI Minimum Volatility Index Fund ( EFAV), each provide an original twist on the low-volatility indexing strategy. However, their success thus far has been limited.

The crippling fear that had plagued the global market during most of November appears to have fallen by the wayside as investors gear up for the final weeks of 2011. As I explained earlier this week, while the recent bout of upward action may be encouraging, it is important to keep a level head in this volatile environment. It is still young, but the PowerShares S&P 500 Low Volatility Portfolio has already shown during its short lifetime that it is well-equipped to weather the challenges of a choppy market.

Keep this fund on the radar. Looking ahead, it stands a strong chance of becoming a mainstay within the ETF universe.

Written by Don Dion in Williamstown, Mass.

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At the time of publication, Dion Money Management did not own any equities mentioned.

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