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ETF Specialist

Mega-Caps: The Original Low-Volatility Stocks

We are believers in low volatility, just not at any price.

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Recently, low- or minimum-volatility ETFs have been all the rage.  PowerShares S&P 500 Low Volatility (SPLV) and  iShares MSCI USA Minimum Volatility (USMV) have combined to attract $9 billion in assets in less than two years since inception. SPLV selects the 100 least-volatile stocks from the S&P 500, and it is touted as a simple way to take advantage of the low-volatility anomaly. However, there is perhaps an even simpler way: mega-caps. 

For those of you unfamiliar with the low-volatility anomaly, a short review is in order. In the 1970s, Fischer Black observed that low-beta stocks, which were less sensitive to the broad market's gyrations, performed nearly identically with high-beta stocks. This contradicted a fundamental prediction of the capital asset pricing model, or CAPM, which was that higher beta equals higher returns. A number of more recent studies have shined a light on the anomaly, including "Benchmarks as Limits to Arbitrage: Understanding the Low Volatility Anomaly," by Baker, Bradley, and Wurgler.

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Michael Rawson does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.