(Bloomberg) -- Low-volatility funds are supposed to insulate investors from the market's bouts of turbulence. Lately, that's been flipped on its head.

For six weeks, the most popular low-volatility ETF has experienced price swings that were wider than the broader market. While not the first time it's happened, never before has it gone on this long. BlackRock's iShares Edge MSCI Minimum Volatility ETF has traded with higher volatility than the S&P 500 for 42 days, eclipsing the old record of 16.

Billed as a way to smooth out the turbulence of the broader market, low-volatility funds buy shares with a recent record of muted swings. Often, those are in defensive industries such as utilities and real estate, stocks that pay higher dividends because they're less susceptible to the vagaries of shifting economics. Those shares are the ones working against them now.

"They try to find the best combination of stocks to minimize volatility. That's all fine and dandy if things work how they do historically, but in real life, historic relationships change," said Pravit Chintawongvanich, head derivatives strategist at Macro Risk Advisors in New York. "The more crowding, the more overvalued these became, and eventually there's a valuation correction. Maybe you're seeing the crowding exacerbating the price swings."

SOBERING LESSON

Investor interest in low-volatility strategies reached a fever pitch earlier this year, with $8 billion pouring into the most popular funds. With interest rates at historic lows, attractive dividend-yielding stocks became popular and the low-vol universe grew more expensive. Then defensive industries like utilities succumbed to a selloff among rate-sensitive stocks. The crowded field began a painful unwinding in August — and it has yet to subside.

While a few weeks' performance says nothing about the strategy's long-term viability for risk-mitigation, the ETF's swings illustrate what some say are distortions in a market that's been dominated by defensive shares. And for the millions of investors who became enamored with smart-beta funds, it's been a sobering lesson that even the best-conceived portfolios can be subject to unintended consequences.

BlackRock's minimum volatility fund, celebrating its five-year anniversary this month, has had eight instances since its inception where it grew more volatile than the broader market. According to the New York-based asset manager, that's not a concern when investors hold the fund as it's intended — over an extended period of time where such abnormalities can be smoothed out in a matter of days.

INVESTORS FLEE

What's notable now is how long the ETF has continued to swing. On average, when the fund's 30-day volatility becomes greater than the SPDR S&P 500 ETF Trust, it lasts fewer than four days, data compiled by Bloomberg show. This time around it's lasted 10 times that.

On Sept. 26, the BlackRock fund's historic volatility sat 1.2 points higher than the SPDR S&P 500 ETF, according to 30-day data compiled by Bloomberg. That marked the widest spread since the fund's inception. It has since shrunk and was at 0.5 points on Tuesday; still nearly 120% above the measure's five-year average.

For all the love the low-volatility ETF got at the beginning of the year, investors are now casting it aside at a record pace. Since August, $1.2 billion has been pulled from the fund, the most outflows it's experienced in three years. Meanwhile, its net asset value was cut by 6% from its July high as the fund fell to a five-month low. Its NAV stood at $44.35 Tuesday.

DOCILE MARKET

One reason the ETF appears to be so volatile is the broader market has been remarkably docile, causing its strategy to appear choppier than it would in isolation, said Rob Nestor, head of iShares U.S. smart beta at BlackRock.

"The market overall has seen nearly unprecedented low levels of volatility. We don't ignore it, but short-term blips can happen," Nestor said. "What happened in August and September is there were worries about defensive sectors, particularly the concern on global rate policy. That's a pretty short-term phenomenon."

The S&P 500's 30-day volatility reached a record low in September and still sits below its 10-year average, data from Bloomberg show. The iShares Minimum Volatility ETF, which according to Morningstar rankings is in the top 1% of all large cap domestic equity ETFs and mutual funds by risk adjusted returns since inception, is 32% higher than its five-year average.

REBALANCE COMING

If defensive shares don't settle down on their own, the twice-annual fund rebalancing also might help restore calm, said Nestor.

In May and November the fund swaps out shares that no longer fit within the parameters of its risk model. Currently, that construction is heavily weighted toward rate-sensitive industries like real-estate companies and utilities. Real-estate shares, which are 10% of the portfolio, have the highest historic volatility in seven months. Utilities, 8.6% of the portfolio, have the highest volatility in over a year, Bloomberg data show.

"People just have to look and think why the volatility factor has outperformed so much and what are you really making money on," said Chintawongvanich. "There's no way to guarantee that you'll be less volatile than the S&P 500 other than having money in cash."

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