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.