Investors hoping the sudden volatility would stop and the stock market would get back to its bull run are probably realizing that was wishful thinking. Many market watchers zeroed in on the role of inverse ETFs that short the VIX volatility index as a sign that this downturn was a freakish blip. But trading in ETFs designed to buy less volatile stocks, known as minimum volatility ETFs, are suggesting a trend more ominous right now: There's no place in the market that's safe to hide — at least not just yet. Stocks that fit a minimum volatility strategy are getting marked down almost as aggressively as the market as a whole.
Based on trading history, the VIX itself has signaled that volatility will not vanish. In a note published Thursday, DataTrek Research took a look at the ETFs designed for minimum volatility and found they are selling off not just alongside the market but almost as much. That leads DataTrek to the conclusion that there's no stock safe from big repricing.
DataTrek looked at trading in USMV (iShares Edge MSCI Min Vol USA) and SPLV (Powershares S&P 500 Low Volatility Portfolio). Combined, they have $24 billion in assets under management and are the two most popular minimum volatility ETFs focused on U.S. stocks.
The goal of these ETFs is to capture most (75 percent) of the upside move in U.S. equities but limit downside exposure during downdrafts (50 percent or less). They own stocks with less actual price volatility and exclude stocks with higher levels of turnover. And DataTrek noted that over much of the last five years, this approach has worked well enough:
- S&P price return from 2013–17: 90.6 percent
- Price return for USMV: 84.1 percent
- Price return for SPLV: 74.7 percent
But the past few days reveal a few troubling stats. The downside capture for USMV/SPLV from the January peak for the S&P 500 (Jan 26 close) to now: 93 percent to 94 percent. And the returns:
S&P: down 6.7 percent
USMV: down 6.3 percent
SPLV: down 6.2 percent
The downside capture over the last month was more than 100 percent. And the returns:
S&P 500: down 2.2 percent
USMV: down 2.9 percent
SPLV: down 3.4 percent.
From Dec. 15 to the end of the year to the Jan.y 26 closing highs, USMV/SPLV underperformed dramatically. The S&P 500 rose by 8.3 percent; the average performance of the two funds was just 3.9 percent (or 47 percent upside capture), DataTrek noted. Investors have noticed: USMV/SPLV show negative money flows over the past week to the tune of $770 million.
One potential wrinkle is dividend yields. Dividend stocks get hit hard as interest rates go up, since higher rates make dividends less attractive for the stock risk entailed. But Colas said these ETFs don't have an outsized yield compared to the S&P 500, so the rate issue isn't necessarily hurting them.