One of the most successful product innovations of the last few years has been the growth in minimum volatility, or “Min Vol” ETFs, that seek to provide market returns while lowering volatility. Assets have grown from under $1 billion at the end of 2011 to $44 billion today, a growth rate of 132% annually (Figure 1).
FIGURE 1: AUM ($bns) in Low Volatility ETFs
The last few sessions notwithstanding, it is ironic that these funds have gained such popularity in an era when markets have been unusually tranquil. Nonetheless one question we often get is, “Is the Min Vol trade too crowded?” We do find some shortcomings with these funds (see Dec. 2015 ETF Advisor), but on the specific question of whether too much money has flowed into these stocks, setting them up for a reversal, the answer is probably not.
As impressive as their growth has been, the assets dedicated to these strategies in only about 2.5% of all equity ETF assets. Further, while valuations of companies in the iShares MSCI USA Minimum Volatility ETF (USMV) have certainly gotten richer over the past five years, so too have market valuations overall. On a relative basis, USMV’s forward price-to-earnings multiple has traded within a fairly narrow range of 1.06x–1.19x the forward P/E for the S&P 500 (SPY), as shown in Figure 2. That’s a premium to be sure, but fairly small and not indicative of growing or overdone enthusiasm for low volatility stocks.
FIGURE 2: Relative P/E Ratio
iShrs. Min Vol (USMV) vs. S&P 500 SPDR (SPY)
Do you think Minimum Volatility ETF still hold appeal?