For investors who do want to stick with a low-volatility approach, Morningstar notes that mega-cap stocks may be an even simpler way to implement the strategy.
Morningstar analyst Michael Rawson points out that over the past decade, mega-cap stocks have been a bit less volatile than the S&P 500, although the asset class not exhibited the same outperformance of pure low-volatility strategies.
Yet in the current environment, mega-cap ETFs could be a better choice than low-volatility strategies that are often concentrated in defensive sectors that are looking pricey.
“Clearly, portfolios of less-volatile stocks have a performance edge over the long run, but is now a good time to invest in this strategy? Low-risk stocks and those with a high dividend have had excellent recent returns, but they are beginning to look expensive,” Rawson wrote.
“We like the benefits of the low-volatility strategy, but based on valuation, a better approach at the current time is to invest in mega-cap stocks,” he added.
Mega-cap ETFs include iShares S&P 100 (NYSEArca: OEF), Guggenheim Russell Top 50 Mega Cap (NYSEArca: XLG), SPDR Dow Jones Industrial Average (NYSEArca: DIA) and Vanguard Mega Cap (NYSEArca: MGC).