There are more than a dozen US ETFs with “Low Volatility” in their names. It made a difference this year as many Low Vol ETFs struggled to keep up with during this year’s “downturn” when one would normally expect lower-than-average volatility to go down less than the market in a year when market volatility is high. As a result of failure to live up to expectations, many of these ETFs bled assets under management (AUM). However, there are important differences in the manner in which these ETFs are constructed that can make their performance quite different in the same market cycles.

Here is a vivid example courtesy of ValuEngine, a 20+-year provider of stock, ETF, and portfolio analytic reports and tools. Better still, visitors can get up to 50 ETFs reports free of charge. That price worked for me.

So, let’s take a look at the ValuEngine reports on two different ETFs with “low volatility” in their names: SPLV from Invesco and FDLO from Fidelity. The price charts show that while both lagged the S&P 500 during the monotonic upward period, FDLO tracked it more closely.  Through October and into November, FDLO gained back most of that ground while the gap between SPY and SPLV is considerably greater. A deep look at the methodology discloses the differences but takes some detective work...   

Invesco’s SPLV replicates an S&P index that uses a simple screen. It consists of the 100 stocks from the S&P 500 Index with the lowest realized standard deviation over the past 12 months prior to rebalancing. This description can be found on page 2 of the report. 

The description of FDLO looks almost identical except its index is the Fidelity Low Volatility Factor Index. I had to Google the index methodology to learn that the Low Volatility Factor takes a so-called “Smart Beta” approach that controls for industry sector and size to isolate the desired factor. The differences in methodologies create a very different portfolio.

As a less-diversified strategy selected by a screen, SPLV’s performance suffered principally because of the precise nature of this downturn - free fall that took all S&P 500 stocks down by virtually the same percentage as many futures were sold off, followed by a relentless but more protracted monthly recovery which restored the S&P 500 to pre-CoVid crash levels but did not do the same for the 100 low vol stocks in SPLV. FDLO with an industry sector profile more closely resembling the S&P 500 tracked the index more closely during the April through August boom and has made up most of the remaining difference as the market recovery sputtered in September and October.

Although the fund description sheds only a veiled clue in the difference in methodologies, the sector and market cap profiles on page 4 and the top 10 holdings list on page 3 provides much more helpful insights. The most jarring differences in the sector weightings are in comparisons between the Technology Sector, accounting for 25.7% of FDLO but less than half that in SPLV. Alternatively, finance accounts for 33% of SPLV and only 11% of FDLO.  The top 10 holdings lists confirm these differences with MSFT and GOOGL being the biggest weightings by far in FDLO.

My advice; ALWAYS READ THE FUND FACT SHEETS to see what you are actually buying. Then, to analyze key differences.