With markets experiencing wider oscillations, low-volatility exchange traded funds are outperforming traditional broad equity market bets.
As witnessed this week, international events may still trigger market volatility, notably the recent sell-off in Chinese markets. The CBOE Volatility Index and VIX-related exchange traded products also spiked Thursday after a quick plunge in Chinese markets triggered selling in the U.S. and inflamed investor anxiety. [Volatility ETFs Surge on China Woes]
Nevertheless, investors who still want a foot in the markets but are wary of further wild swings can use low-volatility ETFs that track equities and dampen 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.
The low-vol ETF strategy has also been outperforming. Over the past three months, SPLV gained 4.0% and USMV rose 2.9% while the S&P 500 returned 1.1%. Moreover, the low-vol ETFs outpaced the benchmark index in the new year, or at least the smart-beta strategy has not retreated as much.
Investors can also 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 if the markets turn around.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.