Quant ETFs Dodging Stock Volatility Bleed Cash 17 Months Running
(Bloomberg) -- The endless flood of cash into exchange-traded funds this year is bypassing at least one corner of the $6.6 trillion U.S. market.
Investors are set to withdraw millions from stock products pursuing a low-volatility strategy for the 17th month in a row, according to data compiled by Bloomberg.
Collectively, the defensive quant funds have lost about $14.6 billion so far this year. The last net inflow was back in February 2020 -- just before the Covid-triggered market meltdown.
Low-volatility products are part of the $1.5 trillion market for so-called smart-beta funds, or ETFs that deploy quant strategies. By investing in stocks that don’t move around too much, the aim is to outperform in a selloff. But in the pandemic-fueled crash they famously struggled to live up to their label and their reputation never recovered.
“Investors that have held these to protect the downside in weak markets didn’t get rewarded in 2020,” said Todd Rosenbluth, head of ETF and mutual fund research at CFRA Research. “And if they’ve held on, they’ve seen the market continue to recover sharply in the past year and they’ve been left behind.”
In 2021, the two largest low-vol funds -- the $28.2 billion iShares MSCI USA Min Vol Factor ETF (ticker USMV) and the $8.6 billion iShares MSCI EAFE Min Vol Factor ETF (EFAV) -- have risen 11.2% and 4.1%, respectively, compared with 16.3% for the S&P 500. Investors have pulled $8.1 billion from USMV and $2.4 billion from EFAV.
To be fair, many low-vol funds have a respectable track record. USMV has fallen less than the S&P 500 during all of the index’s largest weekly drops since the fund started trading 2011, according to Bloomberg Intelligence.
Part of the issue is that factor strategies like low volatility are intended to work over long periods. That means they “tend to stand out during prolonged down markets,” BI analysts Athanasios Psarofagis and Eric Balchunas wrote in a note this week. Recent bouts of turmoil have simply been too brief to allow them to shine.
“Ultimately if the market turns south again, if these funds deliver the types of returns that investors would expect them to and they make up for some of the ground they lost since the market rebounded, then flows might reverse,” said Ben Johnson, director of global ETF research at Morningstar. “Absent any sort of change in prevailing market condition, I think the trend will probably continue for the foreseeable future.”
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