Consider a Low Vol ETF to Limit Potential Risks

With the markets pushing toward new highs and many continuing to chase after risk assets, ETF investors may consider ways to hedge against potential volatility that could shake the markets.

“You do see a lot of uncertainty,” Dan Draper, Global Head of ETFs for Invesco PowerShares, said at the recent Morningstar ETF Conference. “There’s a lot of anxiety around valuation levels. Now we have geopolitical events like North Korea. So, you are seeing, really, small spurts of volatility, and I think that’s where we’ve had very good success around low volatility equity products.”

For example, the popular PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV) targets the 100 stocks from the S&P 500 with the lowest realized volatility over the past 12 months. SPLV was the first ETF designed specifically to target the low volatility factor, allowing investors to track U.S. equities that have exhibited lower drawdowns during periods of heightened volatility.

“I want to be able to sleep at night, so how can i get this exposure to these great S&P 500 companies but at the same time make sure that there is a little better risk/reward benefit, especially the downside,” Draper said. “By deconstructing the market cap weighting and screening first by the companies with the lowest volatility, which the index does, and then you re-weight with the least volatile with the highest weighting down, so that give you the combination of not only a screening of low volatility stocks but also it’s weighting within the index itself, which also favors the low vol.”