Much to the active investor’s chagrin, the least risky stocks on the market tend to outperform riskier picks. Consequently, investors may be better off sticking to a low-volatility index-based exchange traded fund.
From 1970 to 2011, fund manager GMO found that the top 25% of U.S. stocks with the highest sensitivity to the market generated an average annual return of 7.2% at double the risk of the 25% of stocks with the lowest sensitivity to the market, which generated an annual return of 10.6%, reports John Authers for the Wall Street Journal.
Across global equities, the least market sensitive stocks averaged a 10.1% return since 1984, compared to a 4.1% return for the most market sensitive. [The Advantages of Steady Low Volatility ETFs]
ETF investors can also target the low volatility portion of the U.S. equities market through the PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV), and iShares MSCI USA Minimum Volatility ETF (NYSEArca: USMV). SPLV takes the 100 least volatile stocks from the S&P 500 while USMV takes into account variance, correlation and sensitivities to risk factors. Year-to-date, SPLV is up 12.8% and USMV is 12.6% higher, whereas the S&P 500 index increased 10.4%. [Minimum Volatility ETFs Strut Their Stuff in October]
Investors can also track global low-volatility stocks with ETF offerings like the iShares MSCI All Country World Minimum Volatility ETF (NYSEArca: ACWV), which takes about 300 of the least volatile stocks from the parent MSCI All Country World Index. ACWV has increased 9.6% year-to-date, whereas the iShares MSCI ACWI ETF (NasdaqGM: ACWI) gained 4.0%.
Additionally, the iShares MSCI Emerging Markets Minimum Volatility ETF (NYSEArca: EEMV) takes about 200 of the least volatile picks from the MSCI Emerging Markets Index. EEMV is up 4.6% year-to-date while the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) is 0.9% higher.