We have been sitting through some wild market swings. However, investors can help dampen portfolio gyrations with low-volatility exchange traded funds strategies.
“We believe the combination of slower global growth, uncertainty as to the Fed’s future path and less benign credit market conditions suggests that this period of heightened volatility is likely to persist,” writes Russ Koesterich, Managing Director and BlackRock‘s Global Chief Investment Strategist. “Rather than attempting to time each swing, investors may be better off managing the risks embedded in their portfolios.”
Koesterich issued a warning on momentum companies, which are exposed to more spikes in volatility, a factor that has fueled biotech’s recent plunge. On the other hand, the strategist pointed out that quality companies, which show strong return on equity and low debt, may do better during periods of elevated volatility.
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. 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 underperform 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.