The problem I see with many of the low-volatility mandates in the
investment fund universe is that investors have bid up the valuation levels
of many of the stocks held in these products to very high levels. But not
all ETFs suffer from this phenomenon. For example, consider the FundGrade A+ Award-winning
PowerShares S&P/TSX Composite Low Volatility ETF (TSX: TLV), which manages to keep its price-earnings ratio in line with the broader
In contrast, consider that the price-earnings ratio of the comparable
BMO Low Volatility Canadian Equity ETF (TSX: ZLB)
was recently 20 times forward earnings. That compares with 17 times for the
S&P/TSX 60 Index and 16 times for the PowerShares S&P/TSX Composite
Low Volatility ETF, which is more in line with the broader
market. Further, if you consider the forward-looking growth rates, TLV
looks to have a more positive outlook than ZLB, making the valuation levels
that much more compelling.
There are a couple of other reasons to favor TLV over ZLB. One is that TLV
is rebalanced on a quarterly basis, making it potentially more responsive
to the market than other low volatility ETFs. Another reason to like the
PowerShares offering is its lower cost, with an MER of 0.33% compared with
0.39% for the BMO ETF.
A drawback to TLV lies in the sector constraints, or lack thereof. There
are no maximum limits on the sector exposure. With no constraints, it has
the potential to get pretty concentrated in one or two sectors. A higher
concentration portfolio can be a double-edged sword, and can either help or
hurt depending on which way the market moves.
The bottom line is I believe that TLV is better positioned to outpace its
peers. Historically, valuations typically regress back to the mean, making
it highly likely the other, more richly valued low volatility Canadian
equity ETFs will experience a sustained period of underperformance in time.
Considering all factors, I believe that TLV is better positioned than other
low volatility ETFs currently.
ETF trading symbol:
FundGrade A+™ Award:
Mid Cap Value
PowerShares Management Team
See the Fundata Fund SnapShot for more details.
Dave Paterson, CFA, is the Director of Research, Investment Funds for
D.A. Paterson & Associates Inc., a consulting firm specializing in providing research and due
diligence on a variety of investment products. He is also the publisher
Dave Paterson’s Top Funds Report,
offering regular commentary and in-depth analysis of Canada’s top
investment funds. He uses a unique analytical approach to identify
funds with strong, risk-adjusted returns, and regularly publishes his
insights and analyses in Fund Library.
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