The first half of 2022 was brutal for equity investors, with the S&P 500 dropping 20.6% and marking the worst start to the year since 1970. That sent some ETF investors into low and minimum-volatility strategies, with FactSet data showing a net inflow of $2.16 billion into non-leveraged funds with those phrases in their names.
VettaFi surveyed a trio of advisors about which low-volatility ETFs they favor in an uncertain time for the future of stock performance.
USMV: The Classic Low-Vol ETF
John Ingram, CIO and partner at Boston-based Crestwood Advisors, prefers the largest minimum-volatility ETF on the market today: the iShares MSCI USA Min Vol Factor ETF (USMV). The fund’s expense ratio of 15 basis points is beaten only by two State Street ETFs charging 12 basis points but is usually cheaper to trade, thanks to its tight average spread of 0.01%.
The fund posted a loss of 12.41% year-to-date, outperforming the Russell 1000’s loss of 20.23%.
Ingram favors USMV because of its performance during downturns but emphasized that its benefits are most felt over a longer time horizon.
“Investors need to be patient with USMV as it usually lags the market during strong bullish periods but tends to perform well over a market cycle,” he said.
LVHD: Low-Vol & Dividends
Curtis Congdon, president of Rockville-based XML Financial Group, said he prefers the Legg Mason Low Volatility High Dividend ETF (LVHD) to minimize exposure to the broader market’s moves.
LVHD selects between 50 and 100 stocks based on a blend of volatility and dividend history to target what Legg Mason calls “stable yield.” More than 60% of the fund’s portfolio is in utilities, non-durable consumer goods, and finance firms.
The fund’s emphasis on dividends gives it a better distribution yield over time than a cohort of competing ETFs that also benchmark against large-cap indexes like the MSCI USA Large Cap Index.
“This produces an allocation that compared to other equity ETFs tends to be more stable and higher-yielding,” he said.
Low-Vol Sectors
Low and minimum-volatility ETFs tend to hold stocks that fit their index rules across sectors in one package, but North Carolina-based Cardinal Retirement Planning uses an in-house artificial intelligence program to build low-volatility portfolios of ETFs with lower movement to the broader market.
Chief Investment Officer Anessa Custovic said the firm is currently tilted to the defensive equity sectors of consumer staples, utilities, and health care, along with ultra-short bond ETFs. She also noted that the funds primarily focus on equities based in the U.S. and developed markets, as Russia’s invasion of Ukraine has clouded the outlook abroad.
“It’s really more, so value and defensive plays that we’re seeing coming up,” she said.
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