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ETF Specialist

A Small-Cap ETF That Minds the Downside

This fund should hold up better than most of its peers during market downturns.

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 PowerShares S&P SmallCap Low Volatility ETF (XSLV) aggressively pursues small-cap stocks with low volatility. It should offer a smoother ride and better risk/reward profile than the S&P SmallCap 600 and most of its peers. But it can make concentrated industry bets at times and may require high turnover. And it has a limited record. These considerations limit its Morningstar Analyst Rating to Bronze.

Each quarter, the fund targets the 120 least volatile members of the S&P SmallCap 600 Index over the past 12 months and weights them by the inverse of their volatilities, so that the least volatile stocks receive the largest weightings in the portfolio. This strategy implicitly assumes that recent relative volatility will persist in the short term, which has historically held. It does not consider how stocks in the portfolio interact with each other.

Alex Bryan has a position in the following securities mentioned above: XSLV. Find out about Morningstar’s editorial policies.