In an attempt to mitigate market swings, investors can take a look at exchange traded funds that focus on low-volatility stocks, but don’t expect these to strategies to outperform the broader markets during bull runs.
The two largest low-volatility ETFs, the PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV) and the iShares MSCI USA Minimum Volatility ETF (NYSEArca: USMV), provide access to more conservative stock plays that tend to do better during market downturns. [Low Vol ETFs Look to Come Back Into Style]
Although both ETFs are true to their low volatility missions, there are key differences between the two funds. Specifically, USMV factors in how stocks interact with one another, weights each sector within 5 percentage points of the parent index and leans toward stocks that generate relatively stable earnings and are less sensitive to the business cycle than the broader market. SPVL, on the other hand, picks out the 100 least volatile stocks from the S&P 500. [Learning to Love Low Vol ETFs…Again]
“Low-volatility stocks historically have offered higher risk-adjusted returns than their more volatile counterparts, suggesting that the market has not offered adequate compensation for incremental risk,” writes Morningstar analyst Michael Rawson.
However, because of their conservative nature, these low-volatility ETFs will underperform high-flying beta stocks during a strong market rally. Additionally, stocks that show lower volatility have a value tilt.