Low-volatility ETFs have been a popular tool after the financial crisis with investors who want downside protection while maintaining a core position in equities.
For example, iShares MSCI USA Minimum Volatility ETF (NYSEArca: USMV) and PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV) are among the biggest offerings for this strategy. They focus on stocks that have exhibited smaller fluctuations in price. [ETFs to Help Hedge Market Volatility]
“However, the drawback with these ETFs is that in a widespread selloff, they still are susceptible to substantial declines,” writes David Fabian at Fabian Capital Management in a commentary for InvestorPlace.com.
He points to PowerShares S&P 500 Downside Hedged Portfolio (NYSEArca: PHDG) as a potential alternative. The ETF seeks to achieve positive total returns in rising or falling markets that are not directly correlated to broad equity or fixed-income market returns.
The ETF provides investors with broad equity market exposure with an implied volatility hedge by dynamically allocating between equity, volatility and cash.