Major indexes have been on a roller coaster since the start of 2022 as investors are concerned about higher inflation, rising rates and the fast-spreading Omicron variant.

Corporate earnings and economic growth are expected to slow down in 2022 but remain significantly above trend levels, so the bull market is likely to continue. However, market volatility could remain elevated.

Low volatility ETFs tend to perform well in a volatile market environment. These ETFs underperform the broader indexes during strong bull markets but hold up relatively well during market declines.

According to traditional finance theories, investors demand a higher rate of return for taking on greater risks, but academic studies show that lower risk stocks have rewarded investors with higher risk-adjusted returns than the broader markets over longer-term

Low-volatility anomaly was overserved in almost all stock markets around the globe. Investors tend to chase hot, riskier stocks, and ignore low risk, cheap stocks and thus misprice risk.

The two most popular low volatility ETFs—the iShares Edge MSCI Min Vol USA ETF (USMV Quick QuoteUSMV - Free Report) and the Invesco S&P 500 Low Volatility ETF (SPLV Quick QuoteSPLV - Free Report) —take different approaches in selecting their holdings.

USMV holds stocks that, in the aggregate, have lower volatility compared to the broader market. It takes into consideration correlations between stocks in addition to volatility. SPLV selects 100 stocks from the S&P 500 index that have the lowest realized volatility in the past 12 months and weights them according to their volatility.

USMV’s top holdings include Microsoft (MSFT Quick QuoteMSFT - Free Report) , Alphabet (GOOG Quick QuoteGOOG - Free Report) and Berkshire Hathaway (BRK.B Quick QuoteBRK.B - Free Report) . SPLV’s top holdings are Procter & Gamble (PG Quick QuotePG - Free Report) and PepsiCo (PEP Quick QuotePEP - Free Report) .

To learn more about low volatility ETFs, please watch the short video above.