Low Volatility ETFs Stay Afloat in Rough Markets

NEW YORK (TheStreet) -- To attract nervous investors, fund companies have been introducing low-volatility ETFs, which can provide protection in downturns. Recently the funds have been delivering winning results. While the S&P 500 lost 3.7% in the past month, PowerShares S&P 500 Low Volatility(SPLV) gained 0.2%. Over the past 12 months, the PowerShares fund returned 11.7%, outdoing the benchmark by 7 percentage points.

Other funds that provided some cushioning in recent downturns include Russell 1000 Low Volatility(LVOL) , Russell 2000 Low Volatility(SLVY) , and iShares MSCI Emerging Markets Minimum Volatility(EEMV) . If the markets remain jumpy this summer, as many analysts expect, the low-volatility funds could continue outpacing the benchmarks.

Most of the low-volatility funds are less than a year old, so it is too soon to know if they will have staying power. But academic research suggests that over long periods, low-volatility stocks have matched or outdone the overall market while taking less risk.

Why can low-volatility strategies perform so well? Some researchers say that low-volatility stocks tend to be boring issues such as utilities and consumer staples, which report steady earnings. Because they suffer little damage in downturns, the stocks have a big advantage in choppy markets. In contrast, high-volatility stocks tend to be in sectors like technology, which often attract notice from investors. The glamorous companies can be overpriced in bull markets -- and suffer big losses in downturns.

Investors who are attracted to the low-volatility strategies should keep in mind that many of the funds can be concentrated in a few sectors. The PowerShares fund has 60% of its assets in utilities and defensive consumer names. In contrast, the S&P 500 only has 15% in the two sectors. PowerShares only has 1.8% of assets in technology, compared to 18% for the S&P 500.