Low Volatility Small Cap ComparisonSeeking Alpha #Low_VolatilityAugust 27, 2019
While I noted that I own all three funds, I greatly prefer XSLV, which is more liquid, lower cost, and delivers a desired factor tilt for my portfolio.
Some readers commented that they express a view on low volatility small caps through exposure to the iShares Edge MSCI Min Vol USA Small Cap ETF ( SMMV ).
You can see that the S&P Small Cap Low Volatility Index has outperformed by 51bp per annum.
The underlying indices are of course uninvestable, with the exchange-traded funds seeking to replicate these index returns the best way for retail investors to follow these strategies.
I hope that this analysis is valuable to Seeking Alpha readers interested in low volatility small cap strategies but who might not have access to the historical return data.
Despite the very strong correlation noted in the historical return series above, the composition of the two indices is quite unique.
Some prospective investors might recoil at the large weights to Financials and REITs today, but large index skews can keep investors away from rising volatility in sectors that come under stress.
For me, the S&P Small Cap 600 Low Volatility Index’s construction is a simple and transparent way to access a low volatility bent.
I am not seeking to minimize volatility, but generate higher risk-adjusted returns, which the S&P Small Cap 600 Low Volatility has done historically versus both the broader market and the MSCI USA Small Cap Minimum Volatility Index.
Hopefully, readers now better understand the differences in index construction of the two leading low volatility small cap funds and how that manifests into different risk-return profiles.
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