The market continues to focus on the debt-ceiling drama and the government shutdown and as a result, volatility in general has been on the rise. (Minimum Volatility ETFs: Fact or Over-estimated Hype?).
ETFs of almost all segments of the market are witnessing modest sell-offs as investors remain concerned about the outcome of the debt ceiling debate, pushing many to steer clear of risky investments and settle for safer assets instead.
Starting October, the U.S. government went in for its first shut down since 1995, on account of Democrats and Republicans’ refusal to compromise over a number of issues. The resultant shutdown has put a wrench into the gears of the recovering U.S. economy. (3 ETFs to Watch in October).
Markets are expected to remain volatile on account of the uncertainty. Investors who want to stay invested should avoid high volatile products and instead shift their asset base to low volatile products. These products have proved their effectiveness when markets tend to face such concerns.
Investors who invest in low volatility products during an uncertain market environment can make profits above higher volatility peers investments. Low volatility ETFs tend to diminish risk and generate decent returns for investors, while ETFs with higher beta stocks face higher losses.
On the other hand, when markets turn bullish, investors generally opt for high beta stocks to attain above-average gains. At such times, high beta stocks beat the low volatility stocks which tend to underperform. But looking at the longer-term, low volatility stocks have been able to consistently beat the broader market. (2 Low Volatility ETFs to Hedge Your Portfolio (SPLV and USMV)).
Markets may turn out to be volatile in near future and investing in low volatility stocks may provide some hedge to the portfolios.. But instead of investing in a single low volatility stock, one can put in money in multiple stocks wrapped in an ETF for even lower risk exposure.
For these investors, we have highlighted a handful of the low volatility ETF options that are currently available and which could provide better exposure in this rocky market environment:
PowerShares S&P 500 Low Volatility (SPLV - Free Report)
SPLV tracks the S&P 500 Low Volatility Index. The index is comprised of 100 stocks from the S&P 500 Index with the lowest realized volatility over the past 12 months.
SPLV seems to be very popular among investors. Since its launch in May 2011, the fund has managed to amass an asset base of nearly $4 billion. The fund invests its asset base in a basket of 102 stocks which exhibit low volatility.
The fund is not biased in its individual holdings; however, among sectors the fund is highly dependent on the performance of consumer staples and utilities, with total allocation of more than 55% in these two sectors. The fund charges a fee of 25 basis points annually and has returned 12.2% over a period of one year (Zacks Top Ranked Low Volatility ETF in Focus).
iShares MSCI USA Min Volatility (USMV - Free Report)
Another fund which was launched in 2011 is iShares MSCI USA Min Volatility. Since its inception the fund garnered an asset base of $2.1 billion. This fund provides exposure to a larger basket of stocks than SPLV and is home to 133 securities in total.
Unlike SPLV, the fund’s exposure is not limited to consumer staples and utilities. Instead the fund assigns double-digit allocations to health care, consumer staples, financials and information technology sectors.
The fund also has an edge in expenses charging a fee of just 15 basis points annually while generating a 30-day SEC yield of 2.57% in the process. The fund delivered a return of 14.57% over a period of one year.
iShares MSCI All Country World Minimum Volatility Index Fund (ACWV)
ACWV shares its launch date with USMV with the difference that its exposure is not limited to U.S. equities but is spread across low volatility equities in the world market. Since its inception the fund could manage to build an asset base of $1.1 billion and provides exposure to 296 low volatility stocks.
Although the ETF has been designed to provide exposure to low volatility stocks of many countries, the U.S. accounts for 50.06% of the asset base. Apart from this, Japan is the only country with a double-digit allocation (Three Low Volatility ETFs For Stormy Markets).
Financials, health care, consumer staples and consumer discretionary get a double-digit allocation in the fund. The fund charges a fee of 34 basis points and delivered a return of 12.2% over the past year.
The Bottom Line
It is a fact that low volatility products have been very popular among investors. This is not only during uncertain times, but also over the longer-term. They have justified their investment strategy to the full extent, and have also given investors the opportunity to earn high returns over the longer term.
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