Now more than ever, investors are looking to play more defense against volatility, but at the same time, don’t want to do so at the expense of higher costs. This used to be had using the S&P 500 as a buffer against volatility, but those days of yore has investors hoping for more.
Yesteryear’s S&P 500 featured consumer staples that gave investors peace of mind even when market volatility decided to try and spoil the party for the capital markets. Fast forward to today and its adorned with higher-volatility stocks from sectors like technology and finance.
“The S&P 500 is not the S&P 500 that we knew 10 years ago–growth, higher P/Es (price-to-earnings ratios), more technology, more financials,” said ETF Trends CEO Tom Lydon. “When you look at low volatility ETFs, there’s more consumer staples.”
When markets are oscillating the way they have been the past week, a value-oriented tilt is necessary. With the S&P 500 containing stocks that skew towards growth and momentum, this can make the index more prone to wild market swings.
“It’s all been growth, it’s all been momentum and those are the areas that are getting punished the worst,” said Lydon.
As such, here are some ETFs to consider for low volatility plays:
- iShares Edge MSCI Minimum Volatility USA ETF (USMV)
- iShares Edge MSCI Min Vol EAFE ETF (BATS: EFAV)
- iShares Edge MSCI EM Minimum Volatility UCITS ETF (BATS: EEMV)
One other ETF to consider is the Salt High truBeta US Market ETF (BATS: SLT). SLT’s strategy begins by selecting components from the Solactive US Large and Midcap Index, which comprises a benchmark of the top 1,000 stocks in the US ranked by market capitalization.
This field of equities is further filtered by trading volume, helping minimize transaction costs in tracking the index while selecting from a broad range of more liquid US large and midcap stocks. The portfolios are equally weighted, sector capped, and then rebalanced quarterly.
“Small or large investors and advisors are attracted to more defensive equity exposure that targets lower volatility,” Alfred Eskandar, President & COO of Salt Financial LLC, told ETF Trends. “Low volatility investing in general has also performed well against the broader market historically and tends to carry a higher yield.”
At the heart of any fund is its strategy and for LSLT, it starts with risk assessment. The ETF tracks the Salt Low truBeta™ US Market Index, which gives exposure to US large and midcap equities with the opportunity for better risk adjusted returns.
“It starts with truBeta, our proprietary measure of market risk (beta),” said Eskandar. “A more accurate and responsive estimate of risk helps more consistently target low volatility stocks. The index methodology also tends to allocate more weight to Consumer Staples and less to Financials and Utilities, providing different exposure than some other low volatility strategies while still keeping an equally low risk profile.”
Furthermore, the index LSLT tracks has a lower PE ratio and a higher yield compared to some of the leading low volatility alternatives. As such, investors who are keen on lowering their market risk while maintaining exposure to US equities should find LSLT an attractive addition to their portfolio.
For more market trends, visit ETF Trends.