Using Low-Volatility ETFs to Endure Market Swings | ETF Trends

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.