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11 Low-Volatility ETFs for a Roller-Coaster Market

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21.09.2021

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​Volatility has made its way back into the markets. And unsurprisingly, so has curiosity about a special brand of exchange-traded fund: low-volatility ETFs.

The desire to tamp down volatility is pretty easy to understand: Investors hate uncertainty, and they hate to lose money. One of the easiest ways to do both is to "go to cash" by selling off equities. But naturally, if you panic-sell, you risk throwing the baby out with the bathwater. And in many cases, investors who jettison their stocks en masse on the way down cement their losses while leaving themselves out of the recovery.

Enter low-volatility ETFs.

In a variety of ways, these funds try to reduce overall volatility (and downside) while still keeping you invested in the equity market, so you can still capture some upside whenever the markets return to a calmer, more productive trajectory.

But here's an important lesson that investors learned the hard way during COVID: Low-vol ETFs aren't magic bullets against rapid downside events. These funds typically can reduce overall volatility over longer time periods, but they still can suffer mightily against sudden market shocks. So, for instance, if you're looking to ward off a potential market contagion event from China's recent Evergrande debacle, check what's inside – the simple fact that they're meant to reduce volatility doesn't mean they're immune.

Here are 11 low-volatility ETFs that should give you more peace of mind in the long run. While all 11 funds should help investors reduce volatility, they do so across a number of strategies – not just low-vol, but also min-vol, "buffering" and other approaches. Take a look.

Data is as of Sept. 19. Dividend yields represent the trailing 12-month yield, which is a standard measure for equity funds.

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Courtesy of Invesco

When it comes to volatility products, you typically see two types: low-volatility ETFs and minimum-volatility ETFs. Let's start with the former.

The Invesco S&P 500 Low Volatility ETF (SPLV, $62.58) is a pretty straightforward fund that tracks the S&P 500 Low Volatility Index, which is composed of the 100 S&P 500 components with the lowest realized volatility over the past 12 months. It then assigns weights to each stock based on its volatility (well, lack thereof).

One popular way to measure volatility is called "beta," which tracks a security's volatility compared to some benchmark. The benchmark here is the S&P 500, and the benchmark will always have a beta of 1. SPLV has a beta of 0.70, which implies the fund is about 30% less volatile than the broader market.

Again, this doesn't mean SPLV will outperform during a market shock. During the quick COVID bear market, this low-volatility ETF underperformed the S&P 500 by about 2 percentage points in in that time. It has done better over longer periods of tumult, however. Take June 2015 to June 2016, when the market's roller-coaster movement generated a marginally negative return; SPLV was up by nearly 9%.

The portfolio is bound to change over time depending on which parts of the market are more volatile than others, but for now, it's unsurprisingly heavy in consumer staples (22.3%) and utility stocks (18.2%) – two defensive, high-yielding sectors. Top individual holdings include telecom Verizon (VZ), consumer products brand Procter & Gamble (PG) and fast-food giant McDonald's (MCD).

Learn more about SPLV at the Invesco provider site.

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Courtesy of iShares

Minimum-volatility ETFs work a little differently.

Rather than simply taking a portfolio of the lowest-volatility stocks within an index, min-vol funds evaluate not just volatility, but other metrics too, such as correlation (how a security moves in relation to the market). They also sometimes try to keep sector weightings and other factors close to the original index they're working with. The idea is to put together a portfolio that minimizes risk while still achieving some other goal. But because of that, min-vol ETFs sometimes will hold stocks with relatively high volatility (such as gold miners).

If it's hard to tell the difference, think about it this way: Min-vol ETFs try to provide a low-volatility basket of holdings. Low-vol ETFs try to provide a basket of low-volatility holdings.

That brings us to the iShares Edge MSCI Min Vol USA ETF (USMV, $75.89).

USMV applies a multi-factor risk model, which examines traits such as value and momentum, to the MSCI USA Index, which includes large- and mid-cap stocks. But it also applies a maximum cap weight for every stock (2%, or 20x the stock's weight in the S&P 500, whichever is lower), and its sector weight must be within 5% of the benchmark's standard weight. The goal is to build a portfolio that's less volatile than the broader market – just not by selecting the absolutely least volatile stocks to do it.

The result? Some of what you'd expect, and some of what you might not. Healthcare (19.0%) and consumer staples (10.3%) are two of the heaviest-weighted sectors. But tops is information........

© Kiplinger


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