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Why are low volatility ETFs underperforming now?

Low volatility ETFs, which have gained immense popularity in recent years, have been losing their appeal since the last couple of months despite the prevalent volatility. Investors are flocking to high-risk securities given an improving U.S. economy, strengthening job prospects, recovering housing fundamentals, rising consumer confidence and of course a higher spending power buoyed by cheap oil.

While strong dollar, sliding oil prices, global growth concerns and geopolitical risks had kept the stock returns at check for most of the first quarter, cheap money flows into the global economies as well as delay in interest rates hike by the Fed have attracted huge capital into the stock markets. This is especially true as the S&P 500 is just less than 1% away from the all-time high and could hit another record anytime soon given a big rebound in oil prices, improving global economies, strong seasonality and a positive market momentum.

Amid bullish conditions, low volatility ETFs have underperformed the broader market and will likely continue doing so in the coming weeks. This is because these funds include those stocks in their portfolio that have shown more stability in the past and have experienced the least price movement. Further, these funds contain stocks of rate sensitive sectors, which are lagging since the Fed's latest dovish comments.

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