The string of financial crises in recent years has been etched on the market’s psyche. As a way to mitigate oscillations in their portfolios, investors are turning to a number of low-volatility exchange traded fund options to hedge against potential risks down the road.
Low-volatility strategies tend to underperform during a bull market, but during times of market uncertainty, these types of investments can provide decent risk-adjusted returns.
One of the most popular option has been the PowerShares S&P 500 Low Volatility ETF (NYSEArca: SPLV), which garnered almost $3.1 billion since its launch in May 2011. SPLV holds the 100 stocks of the S&P 500 Index that has shown the lowest realized volatility over the last year. [Low-Volatility ETFs: The New Safe Haven]
Still, with the ever expanding universe of ETFs, investors have other tools on hand. For instance, the Direxion S&P 500 DRRC Volatility Response Shares (NYSEArca: VSPY) tackles the volatility issue through another methodology as a way to generate a greater risk/return portfolio.
Specifically, VSPY mitigates risk by changing its equity exposure to the S&P 500 based on a volatility index. The fund’s equity exposure is calculated by dividing the target volatility of 15% by the S&P 500’s volatility. Consequently, depending on the volatility level, VSPY can take on a cash position in T-Bills of 0% to a little over 80%.