SPLV), which has turned out to be popular in terms of attracting assets and performing well versus the S&P 500 since its inception in 2011. However, the fund has fallen 2.5% in the last three months versus a 0.60% increase for the benchmark. A few days earlier, well-respected investment adviser and author Larry Swedroe had a similar article for CBS News. He noted that low-volatility funds' "ability to produce market-like returns was as confounding as it was impressive." He said they have not performed very well recently and he expects them to continue to underperform for several reasons, including that past outperformance can be attributed to a value bias and being overweight in interest rate-sensitive sectors. I've written extensively about low-volatility funds, the extent to which they have biases or over-weighted exposures that need to be understood before buying any of the funds and then monitored after purchase. This is true of all broad-based index funds. For example, history tells us that when a sector grows to more than 30% of the S&P 500 -- such as technology in 2000 and energy in the early 1980s -- large declines typically follow. Even when a sector gets much above 20% like financials in 2007, it is a warning that investors should heed. SPLV has a 30% weight in the utilities sector, which is one of the most interest rate-sensitive sectors. If interest rates go up then the high yields available in the utilities sector become less attractive and the stocks in that sector can be expected to lag which is an obvious threat to the current portfolio make up of SPLV. Both articles also look at the iShares MSCI US Minimum Volatility ETF ( USMV), which takes a more balanced approach to portfolio construction and has no gross overweight to one sector like SPLV and so is much less exposed to rising rates. USMV has 17% in healthcare, 15% each in financials and consumer staples and 13% in technology with the remaining sectors being much smaller.
USMV's better balance made only a slight difference in the last three months as that fund went down 2.2% As for Barron's saying people with shorter horizons may want to reassess their holding, I would say investors with shorter horizons probably should not own low-volatility funds in the first place. Indexing or value investing along with many other longer-term strategies cannot be deemed a success or failure based on results for a three- or six-month window. No strategy can be the best for all market conditions. Year to date, the S&P 500 is up 16%, which is a big move even after a small pullback recently. A fund that seeks out less volatility than the broad market should be expected to lag when the broad market goes up a lot in a short period of time such as the first eight months of 2013. Low-volatility funds will be more appropriate for investors more suited to a long-term perspective. The supporting research for these funds from the various ETF providers focuses on periods of many years, not several months. SPLV, in its current constituency, does appear to take more interest rate risk at a time when rates finally seem ready to move higher. USMV will likely be the better performer if interest rates do indeed go up. At the time of publication the author had no position in any of the stocks mentioned. Follow @randomroger This article was written by an independent contributor, separate from TheStreet's regular news coverage.