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.