Using Low-Volatility ETFs to Endure Market Swings
August 1st 2012 at 2:31pm by Tom Lydon
Tired of the market’s twists and turns on lingering debt concerns, investors are looking to low-volatility exchange traded funds that promise to provide stable returns, even over periods of wild market swings.
Wednesday’s market provides a good example of the volatility that is spooking individual investors. The NYSE is reviewing over 100 stocks after unusual trading activity shortly after the open. Traders blamed the bizarre moves on a “rogue” algo trading program. Many individual investors feel the market is rigged against them after the 2010 flash crash, and Wednesday’s episode certainly won’t bolster confidence.
U.S. stocks also fell sharply Wednesday afternoon immediately after the Federal Reserve announcement. The central bank didn’t drop any hints on more quantitative easing as some traders had speculated.
Low-volatility ETFs were not made to beat indices like the S&P 500, but with a basket of U.S. stocks that have typically exhibited low volatility, these funds have been outperforming the broader markets. For instance, the PowerShares S&P 500 Low Volatility ETF (NYSEArca: SPLV) has gained 17.3% over the past year, compared to the 8.6% rise in the S&P 500. [Low-Volatility ETFs: Better Performance with Less Risk?]
“Recent returns of low-volatility ETFs have attracted a lot of attention, and, I think, a lot of the flows,” Stephen Cucchiaro, chief investment officer at Windhaven Investment Management, said, reports Chris Dieterich for The Wall Street Journal.
The greater attention in low-volatility funds like the PowerShares offering comes as demand for defensive sector plays rises. For example, SPLV includes tried-and-true holdings like Wal-Mart (NYSE: WMT), Johnson & Johnson (NYSE: JNJ), Kimberly-Clark (NYSE: KMB), Altria (NYSE: MO) and Consolidated Edison (NYSE: ED).
However, investors should note that low-volatility funds would fall behind broad-based rallies, such as what happened over the start of the year when the S&P 500 recorded its best first-quarter since 1999.
“If the market rallies in a sustainable manner, not with these peaks and valleys that we’ve seen, these low-volatility ETFs will definitely lose their luster because these stodgy stocks won’t move up as fast as those that are more risky,” Paul Weisbruch, vice president of ETF sales and trading at Street One Financial, said.
“The classic view is that these stocks won’t make you bankrupt, but won’t make you rich either,” according to Samuel Lee, a Morningstar analyst. But the recent performance is “a bit counterintuitive because they’ve done a pretty good job building wealth while protecting you from volatility.”
Other low-volatility ETFs include:
- iShares MSCI All Country World Minimum Volatility Index Fund (NYSEArca: ACWV)
- iShares MSCI Emerging Markets Minimum Volatility Index Fund (NYSEArca: EEMV)
- iShares MSCI EAFE Minimum Volatility Index Fund (NYSEArca: EFAV)
- iShares MSCI USA Minimum Volatility Index Fund (NYSEArca: USMV)
- PowerShares S&P Emerging Markets Low Volatility Portfolio (NYSEArca: EELV)
- PowerShares S&P International Developed Low Volatility (NYSEArca: IDLV)
- Russell 1000 Low Volatility ETF (NYSEArca: LVOL)
- Russell 2000 Low Volatility ETF (NYSEArca: SLVY)
- Russell Developed ex-U.S. Low Volatility ETF (NYSEArca: XLVO)
PowerShares S&P 500 Low Volatility ETF
For more information on low-volatility funds, visit our low-volatility category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.