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Investment Ideas

Recent market gyrations resulting from worries over global slowdown and sovereign debt problems in Europe have left the investors nervous about the safety of their portfolios.

Due to nature of the problems, it is very much likely that the markets will stay volatile at least through the end of this year. As such, many investors have been abandoning the stock markets and seeking refuge in safer assets.

Most of the “safe” assets now have rock bottom yields and many will produce negative real returns when inflation is factored in. (Read: Three Excellent Dividend ETFs for Safety and Income)

However, there are some investment products that are designed for the investors that want to avoid volatility and limit the downside in their portfolios while staying invested in equities. Low- volatility products in general have proven their ability to deliver superior risk adjusted returns historically.

Thanks to rapid growth of ETFs, the investors can simply pick from a range of low-volatility ETFs available now rather than searching for individual stocks that suit their investment objectives. (Read: Three Defensive ETFs for a Bear Market)

Low-volatility ETFs have attracted a lot of attention recently due to increased market volatility. These ETFs have handily beaten the broader markets in the recent rocky market environment as the biggest low-volatility ETF SPLV has returned 21.05% over the last one-year period versus 11.48% for SPY, the ETF tracking the broader stock market.

Further, since most of the stocks held by the low-volatility ETFs are defensive sectors’ stocks, their distribution yield is usually higher than broader markets’ yield.

The investors should however remember that low-volatility strategies are likely to underperform the broader markets in bullish environment.

PowerShares S&P 500 Low Volatility (SPLV - ETF report)

SPLV tracks the S&P 500 Low Volatility Index, which consists of 100 stocks from the S&P 500 Index with the lowest realized volatility over the past 12 months.

ETF currently has a 30 day SEC yield of 2.99%, while it charges an expense ratio of 0.25% per year. (Read: Three Low Beta ETFs For The Uncertain Market)

The fund was launched in May last year and has proved to be extremely popular with the investors as it has already garnered $2.3 billion in assets. The ETF holds 98 securities currently, concentrated mostly in the Utilities (31.2%) and Consumer Staples (28.7%) sectors. The fund is however very well diversified in its holdings with securities’ weight ranging from 0.73% to 1.59%.

SPLV has a Zacks ETF Rank of 2- Buy.

iShares MSCI USA Min Volatility (USMV - ETF report)

USMV seeks to replicate the MSCI USA Minimum Volatility Index, which is comprised of U.S. securities that have lower absolute volatility. The underlying index begins with MSCI USA Index, which is a capitalization-weighted index, and then follows a rules-based methodology to determine weights for securities in the index.

The fund charges a very low expense ratio of 15 basis points annually while the 30-days SEC yield is 2.48% currently. Heath Care (16.8%), Consumer Staples (15.9%) and Information Technology (14.4%) are the top three sectors.  

The fund made its debut in October last year and has attracted $343.7 million in assets so far.

iShares MSCI All Country World Min Volatility Index Fund (ACWV - ETF report)

ACWV is ideal for investors looking for low-volatility product with global exposure. IT tracks MSCI All Country World Minimum Volatility Index, which is a capitalization weighted index of securities in the developed and emerging economies that have lower absolute volatility. The weight of the stocks in the index is determined by a rules based methodology.

The ETF holds 264 securities which are mainly invested in Consumer Staples (15.4%), Healthcare (14.4%) and Financials (13.7%) sectors.

ACWV has an expense ratio of 0.35% and a 30 day SEC yield of 3.91% currently. The fund’ invests about 53% of its assets in US securities while Japan (13%) and Canada (7%)occupy the next two spots in terms of country exposure.

The fund was launched in October last year and has collected $453 million in assets so far.

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