The markets have experienced a spike in volatility and some believe we are in for more wild swings ahead. Investors, though, can utilize low-volatility exchange traded fund strategies to ride out the any further bumps in the equities market.
Volatility is the new norm for financial markets, writes Mohammed El-Erian, chief economic advisor to Allianz and chair of President Barack Obama’s Global Development Council, for the Financial Times.
“Driven by a combination of tactical and structural forces, it is indicative of an ongoing shift in markets’ operating environment,” El-Erian said.
El-Erian attributes the rise in volatility to six factors, including the slowdown in developing economies, elevated asset prices after an extended bull run, structural problems in some economies that are affecting others, low confidence in policymakers ability to respond effectively, Federal Reserve change in policies that could that could do more harm than good and market liquidity issues.
The volatility is reflected in the sudden 110% surge in the CBOE Volatility Index over the past month, with the index hovering as high as 53 at the height of market selling. The VIX was trading around 25 Thursday, which was still above its average range of around 15 to 20 and well above readings of 12 earlier this year.
Nevertheless, investors who still want a foot in the stock markets but are wary of further wild oscillations can utilize low-volatility ETFs that track equities that exhibit smaller swings. Due to their investment style, low-volatility stocks have also historically delivered better risk-adjusted returns than more aggressive and volatile picks.
For those interested in low-volatility strategies, there are a number of ETFs available that track more steady segments of the markets. For instance, the PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV) tracks the 100 least volatile stocks on the S&P 500, and the iShares MSCI USA Minimum Volatility ETF (NYSEArca: USMV) selects stocks based on variances and correlations, along with other risk factors. [Volatility and growth: Two critical questions for international markets]
Investors can target European market exposure through the iShares MSCI Europe Minimum Volatility ETF (NYSEArca: EUMV). Additionally, the relatively new PowerShares Europe Currency Hedged Low Volatility Portfolio (NYSEArca: FXEU) hedges against currency risks as well as targeting 80 of the least volatile stocks taken from the S&P Eurozone BMI Index. [Low-Vol Europe ETFs to Ride Out Volatile Conditions]
ETF investors can also take the low volatility theme to broader overseas markets. The low-volatility ETFs have helped soften the blow from the global sell-off. For example, the the PowerShares S&P International Developed Low Volatility Portfolio (NYSEArca: IDLV) and iShares MSCI EAFE Minimum Volatility ETF (NYSEArca: EFAV) provide a low-volatile option for developed overseas markets.
Additionally, investors can target emerging market exposure through the iShares MSCI Emerging Markets Minimum Volatility ETF (NYSEArca: EEMV) and PowerShares S&P Emerging Markets Low Volatility Portfolio (NYSEArca: EELV).
However, potential investors should be aware that since these ETFs focus more more slow and stable companies, the low volatility strategy may under perform more growth-oriented stocks in an extended bullish rally.
For more information on low vol strategies, visit our low-volatility category.
Max Chen contributed to this article.