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Amid the negative economic data flows, it is prudent to invest in low-volatility ETFs. This is especially true as these products have the potential to outpace the broader market in an uncertain environment, providing significant protection to the portfolio.
The low-volatility funds include more stable stocks that have experienced the least price movement in their portfolio. Additionally, these are allocated primarily to defensive sectors that usually have a higher distribution yield than the broader markets.
COVID-19 Dampens Growth
The coronavirus outbreak has sparked concerns over economic growth. It has resulted in unprecedented spike in jobless claims and reduced consumer spending. In particular, the latest bouts of data reflect the heavy toll that the disease has taken on economic activities. The weekly jobless claim data showed another 5.245 million Americans filing for unemployment benefits in the week ending Apr 11. This has lifted total claims to 22.03 million over the past four weeks, meaning that the coronavirus-led layoffs erased all the jobs created since the Great Recession in just four weeks.
Retail sales also suffered a drop of 8.7% in March, marking their worst monthly decline on record in the data available from the Census Bureau, which dates back to 1992. Industrial production fell 5.4%, the steepest decline since early 1946 as factories suspended operations late last month due to the COVID-19 pandemic.
Meanwhile, the United States lost 701,000 jobs in March, making it the worst month for American jobs since the depths of the Great Recession in March 2009. In fact, it is the first time that the economy has lost this many jobs in a month since September 2010. Meanwhile, the manufacturing sector contracted in March with activity hitting its lowest level since 2009 while consumer confidence dropped to a near three-year low last month (read: ETFs to Gain or Lose Post Dismal March Jobs Data).
Recession Warning
The International Monetary Fund warned that the coronavirus pandemic is likely to trigger the worst recession since the Great Depression. It predicts the global economy to shrink 3% this year, before rebounding in 2021. The U.S. economy is expected to contract almost double the global drop forecast with GDP falling 5.9% in 2020.
Slowdown in Cases
The pandemic has shown signs of stabilization lately with a slowdown in the number of hospitalizations and intensive-care admissions in New York and Europe, bolstering investors’ confidence. Given the slight improvement in scenario, President Donald Trump plans to reopen the economy before May 1, claiming that the United States has "passed the peak" of new coronavirus cases, even as the country logged a record number of deaths from the disease.
Wall Street has recorded the biggest weekly gain last week since 1974, with the three major indices recovering about half of their losses that were made in late March on heightening coronavirus fears. Notably, the S&P 500 and Dow Jones jumped more than 12% last week, while Nasdaq gaining 10.6%, marking the best week since 2008 (read: Leveraged ETFs That Gained More Than 50% Last Week).
Massive Stimulus
The large fiscal and monetary stimulus from the Federal Reserve and the government will boost the stock market. Notably, the Fed rolled out a massive $2.3-trillion program last week to aid local governments and businesses impacted by the coronavirus pandemic.
ETFs to Tap
In view of the reasons discussed above, we present five ETFs that could be solid options for investors in the current choppy market.
This fund offers exposure to 208 stocks that have historically declined less than the market during downturns by tracking the MSCI USA Minimum Volatility Index. With AUM of $32.7 billion, the product charges 15 bps in annual fees and trades in solid average daily volume of 5.7 million shares. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: Lower Risk in Your Portfolio with These ETFs).
This ETF provides exposure to stocks with the lowest realized volatility over the past 12 months. It tracks the S&P 500 Low Volatility Index and holds 100 securities in its basket. SPLV has amassed $9.4 billion in its asset base and trades in heavy volume of around 5.2 million shares a day on average. It charges 25 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook.
This fund follows the Russell 1000 Low Volatility Focused Factor Index and focuses on stocks that exhibit low volatility and offer downside protection. It holds 459 securities in its basket with AUM of $417.3 million and expense ratio of 0.20%. It trades in average daily volume of about 20,000 shares and has a Zacks ETF Rank #3.
SPDR SSGA US Large Cap Low Volatility Index ETF (LGLV - Free Report)
With AUM of $783.4 million, this product seeks to increase exposure to stocks that exhibit low volatility. It follows the SSGA US Large Cap Low Volatility Index, holding 132 stocks. The fund charges 12 bps in annual fees and trades in average daily volume of more than 139,000 shares (read: Do Low Volatility ETFs Outperform During Market Turmoil?).
This fund offers exposure to stocks with lower volatility than the broader market by tracking the Fidelity U.S. Low Volatility Factor Index. Holding 124 stocks in its basket, it has been able to garner $335.6 million in AUM and trades in average daily volume of 136,000 shares. FDLO charges 29 bps in annual fees from investors.
Bottom Line
Investors should note that these products are not meant for generating outsized returns. Instead, these provide stability to the portfolio, thus protecting the initial investment.
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Why You Should Invest in Low Volatility ETFs
Amid the negative economic data flows, it is prudent to invest in low-volatility ETFs. This is especially true as these products have the potential to outpace the broader market in an uncertain environment, providing significant protection to the portfolio.
The low-volatility funds include more stable stocks that have experienced the least price movement in their portfolio. Additionally, these are allocated primarily to defensive sectors that usually have a higher distribution yield than the broader markets.
COVID-19 Dampens Growth
The coronavirus outbreak has sparked concerns over economic growth. It has resulted in unprecedented spike in jobless claims and reduced consumer spending. In particular, the latest bouts of data reflect the heavy toll that the disease has taken on economic activities. The weekly jobless claim data showed another 5.245 million Americans filing for unemployment benefits in the week ending Apr 11. This has lifted total claims to 22.03 million over the past four weeks, meaning that the coronavirus-led layoffs erased all the jobs created since the Great Recession in just four weeks.
Retail sales also suffered a drop of 8.7% in March, marking their worst monthly decline on record in the data available from the Census Bureau, which dates back to 1992. Industrial production fell 5.4%, the steepest decline since early 1946 as factories suspended operations late last month due to the COVID-19 pandemic.
Meanwhile, the United States lost 701,000 jobs in March, making it the worst month for American jobs since the depths of the Great Recession in March 2009. In fact, it is the first time that the economy has lost this many jobs in a month since September 2010. Meanwhile, the manufacturing sector contracted in March with activity hitting its lowest level since 2009 while consumer confidence dropped to a near three-year low last month (read: ETFs to Gain or Lose Post Dismal March Jobs Data).
Recession Warning
The International Monetary Fund warned that the coronavirus pandemic is likely to trigger the worst recession since the Great Depression. It predicts the global economy to shrink 3% this year, before rebounding in 2021. The U.S. economy is expected to contract almost double the global drop forecast with GDP falling 5.9% in 2020.
Slowdown in Cases
The pandemic has shown signs of stabilization lately with a slowdown in the number of hospitalizations and intensive-care admissions in New York and Europe, bolstering investors’ confidence. Given the slight improvement in scenario, President Donald Trump plans to reopen the economy before May 1, claiming that the United States has "passed the peak" of new coronavirus cases, even as the country logged a record number of deaths from the disease.
Wall Street has recorded the biggest weekly gain last week since 1974, with the three major indices recovering about half of their losses that were made in late March on heightening coronavirus fears. Notably, the S&P 500 and Dow Jones jumped more than 12% last week, while Nasdaq gaining 10.6%, marking the best week since 2008 (read: Leveraged ETFs That Gained More Than 50% Last Week).
Massive Stimulus
The large fiscal and monetary stimulus from the Federal Reserve and the government will boost the stock market. Notably, the Fed rolled out a massive $2.3-trillion program last week to aid local governments and businesses impacted by the coronavirus pandemic.
ETFs to Tap
In view of the reasons discussed above, we present five ETFs that could be solid options for investors in the current choppy market.
iShares Edge MSCI Min Vol USA ETF (USMV - Free Report)
This fund offers exposure to 208 stocks that have historically declined less than the market during downturns by tracking the MSCI USA Minimum Volatility Index. With AUM of $32.7 billion, the product charges 15 bps in annual fees and trades in solid average daily volume of 5.7 million shares. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: Lower Risk in Your Portfolio with These ETFs).
Invesco S&P 500 Low Volatility ETF (SPLV - Free Report)
This ETF provides exposure to stocks with the lowest realized volatility over the past 12 months. It tracks the S&P 500 Low Volatility Index and holds 100 securities in its basket. SPLV has amassed $9.4 billion in its asset base and trades in heavy volume of around 5.2 million shares a day on average. It charges 25 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook.
SPDR Russell 1000 Low Volatility Focus ETF (ONEV - Free Report)
This fund follows the Russell 1000 Low Volatility Focused Factor Index and focuses on stocks that exhibit low volatility and offer downside protection. It holds 459 securities in its basket with AUM of $417.3 million and expense ratio of 0.20%. It trades in average daily volume of about 20,000 shares and has a Zacks ETF Rank #3.
SPDR SSGA US Large Cap Low Volatility Index ETF (LGLV - Free Report)
With AUM of $783.4 million, this product seeks to increase exposure to stocks that exhibit low volatility. It follows the SSGA US Large Cap Low Volatility Index, holding 132 stocks. The fund charges 12 bps in annual fees and trades in average daily volume of more than 139,000 shares (read: Do Low Volatility ETFs Outperform During Market Turmoil?).
Fidelity Low Volatility Factor ETF (FDLO - Free Report)
This fund offers exposure to stocks with lower volatility than the broader market by tracking the Fidelity U.S. Low Volatility Factor Index. Holding 124 stocks in its basket, it has been able to garner $335.6 million in AUM and trades in average daily volume of 136,000 shares. FDLO charges 29 bps in annual fees from investors.
Bottom Line
Investors should note that these products are not meant for generating outsized returns. Instead, these provide stability to the portfolio, thus protecting the initial investment.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>