With many lingering global market risks and now a potential Federal Reserve interest rate hike ahead, exchange traded fund investors may look to a low-volatility strategy that specifically excludes rate-sensitive stocks.
The PowerShares S&P 500 ex-Rate Sensitive Low Volatility Portfolio (NYSEArca: XRLV) gives investors the ability to combine the low volatility and hedging rising rates themes. The underling index is composed of the 100 constituents of S&P 500 Index that exhibit both low volatility and low interest-rate risk.
Related: ETFs to Smooth Out a Volatile Ride
The low-volatility theme has been a popular strategy this year as investors turned to conservative bets in the wake of wild market swings. The low-vol strategy targets stocks that have lower expected risk or less idiosyncratic risks. Specifically, the strategy focuses on equities that exhibit lower beta, a measure of volatility or systematic risk of a security to that of the overall market. Consequently, minimum volatility portfolios are comprised of stocks that exhibit lower market risk or beta.
“With Capital IQ consensus expectations for just 0.1% of earnings growth in 2016, combined with the uncertainty about the upcoming Presidential election and increased possibility of a June Fed Funds rate hike, stock market volatility should remain in the near term,” according to S&P Global Market Intelligence Equity Strategist Sam Stovall.
However, if we see a Fed rate hike in June or July, high-dividend stocks, like utilities or some household product companies, could mirror other rising rate periods and be negatively impacted, Todd Rosenbluth, S&P Global Market Intelligence Director of ETF Research, said in a research note.