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Why Low-Volatility ETFs Should Outperform in September
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Wall Street has been on a tough ride lately, thanks to renewed worries about Fed’s aggressive interest rate hikes. The three main indexes suffered their biggest monthly percentage declines in August since 2015. The weak trend is likely to continue, given rising rates, recession fears, and the historical underperformance.
Against such a backdrop, investors seeking to remain invested in the equity world could consider low-volatility ETFs. These funds — iShares MSCI USA Min Vol Factor ETF (USMV - Free Report) , Invesco S&P 500 Low Volatility ETF (SPLV - Free Report) , Invesco S&P 500 High Dividend Low Volatility ETF (SPHD - Free Report) , Invesco S&P MidCap Low Volatility ETF (XMLV - Free Report) and Invesco S&P SmallCap Low Volatility ETF (XSLV - Free Report) — could be solid options for investors in the current choppy market.
Low-volatility ETFs have the potential to outpace the broader market in bearish market conditions or in an uncertain environment, providing significant protection to the portfolio. This is because these funds include more stable stocks that have experienced the least price movement in their portfolio. Further, these allocate more to defensive sectors that usually have a higher distribution yield than the broader markets (read: 5 Top-Performing Sector ETFs of August).
Aggressive Fed
Jerome Powell, at his Jackson Hole speech, said that the Fed would need to keep interest rates high enough to slow the economy “for some time” in order to curb high inflation. While tight monetary policy "for some time" will bring down inflation from its 40-year high, it means slower growth, a weaker job market and "some pain" for households and businesses.
According to the CME FedWatch tool, nearly half of market participants expect the Fed funds rate to end the year above 3.7%, up from 40% participants a week ago. The Fed has raised its benchmark federal funds rate by 0.75 percentage points at each of its last two meetings to a range of 2.25% to 2.5%.
Recession Risks
The yield curve inversion deepened when the 2-year yield rocketed significantly to its highest level since November 2007. This indicates recession warnings.
Additionally, bouts of weak economic data across the globe added to global slowdown fears. Economic activity in China, the world's second-largest economy, has been declining and the property sector is also suffering. Euro zone inflation for August also rose to another record high, solidifying the case for a hefty rate hike by the European Central Bank on Sep 8.
Historical Underperformance
September is historically the worst month for stocks. Since 1945, the S&P 500 has posted an average loss of 0.6% in September, the worst for any month, with the index advancing only 44% of the time, according to CFRA data. The decline is due to a seasonal phenomenon as investors are more prone to selling than buying when they return from their summer vacations, trading volume after Labor Day is mostly bearish, many mutual funds have fiscal years ending Sep 30, window-dressing is rampant, and investors generally sell stocks to pay tuition bills for their kids’ private schools and colleges.
iShares MSCI USA Min Vol Factor ETF offers exposure to the stocks that have historically declined less than the market during downturns by tracking the MSCI USA Minimum Volatility Index. iShares MSCI USA Min Vol Factor ETF holds 173 stocks in its basket, with none accounting for more than 1.7% of the assets. Information technology takes the top spot at 22.7%, while healthcare, consumer staples and industrials round off the next three spots (read: BlackRock Sees More Volatility Ahead: ETF Strategies to Follow).
With AUM of $27.7 billion, iShares MSCI USA Min Vol Factor ETF charges 15 bps in annual fees and trades in a solid average daily volume of 2.8 million shares. USMV has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
Invesco S&P 500 Low Volatility 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 102 securities in its basket. Invesco S&P 500 Low Volatility ETF is widely spread across sectors, with utilities, consumer staples, and healthcare receiving double-digit exposure each.
Invesco S&P 500 Low Volatility ETF has amassed $11.3 billion in its asset base and trades in a solid volume of around 2.9 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.
Invesco S&P 500 High Dividend Low Volatility ETF offers exposure to 51 stocks traded on the S&P 500 Index that historically have provided high dividend yields and low volatility. It follows the S&P 500 Low Volatility High Dividend Index. Invesco S&P 500 High Dividend Low Volatility ETF is widely spread across sectors, with utilities, real estate, and consumer staples receiving double-digit exposure each.
Invesco S&P 500 High Dividend Low Volatility ETF has amassed $3.9 billion and charges 30 bps in annual fees. The fund trades in an average daily volume of 1 million shares (read: Play Dirt-Cheap Dividend ETFs to Fight More Fed Rate Hikes).
Invesco S&P MidCap Low Volatility ETF offers exposure to the mid-cap securities from the S&P MidCap 400 Index with the lowest-realized volatility over the past 12 months. It follows the S&P MidCap 400 Low Volatility Index and holds 81 securities in its basket. Invesco S&P MidCap Low Volatility ETF is widely spread across sectors, with financials, industrials, utilities and real estate receiving double-digit exposure each.
Invesco S&P MidCap Low Volatility ETF has AUM of $1.2 billion and charges 25 bps in annual fees. XMLV trades in an average daily volume of about 54,000 shares.
Invesco S&P SmallCap Low Volatility ETF offers exposure to small-cap securities from the S&P SmallCap 600 Index with the lowest realized volatility over the past 12 months. It follows the S&P SmallCap 600 Index and holds 121 stocks in its basket. Invesco S&P SmallCap Low Volatility ETF is also widely spread across sectors, with financials, real estate, and industrials receiving double-digit exposure each (read: Should You Buy Small Cap ETFs Now?).
Invesco S&P SmallCap Low Volatility ETF has amassed $739.1 million and trades in volume of 57,000 shares per day on average. The product charges 25 bps in annual fees.
Bottom Line
These products could be worthwhile for low-risk-tolerance investors and have the potential to outperform the broad market, especially if trade fears and the historically weak month continue to dent sentiments.
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Why Low-Volatility ETFs Should Outperform in September
Wall Street has been on a tough ride lately, thanks to renewed worries about Fed’s aggressive interest rate hikes. The three main indexes suffered their biggest monthly percentage declines in August since 2015. The weak trend is likely to continue, given rising rates, recession fears, and the historical underperformance.
Against such a backdrop, investors seeking to remain invested in the equity world could consider low-volatility ETFs. These funds — iShares MSCI USA Min Vol Factor ETF (USMV - Free Report) , Invesco S&P 500 Low Volatility ETF (SPLV - Free Report) , Invesco S&P 500 High Dividend Low Volatility ETF (SPHD - Free Report) , Invesco S&P MidCap Low Volatility ETF (XMLV - Free Report) and Invesco S&P SmallCap Low Volatility ETF (XSLV - Free Report) — could be solid options for investors in the current choppy market.
Low-volatility ETFs have the potential to outpace the broader market in bearish market conditions or in an uncertain environment, providing significant protection to the portfolio. This is because these funds include more stable stocks that have experienced the least price movement in their portfolio. Further, these allocate more to defensive sectors that usually have a higher distribution yield than the broader markets (read: 5 Top-Performing Sector ETFs of August).
Aggressive Fed
Jerome Powell, at his Jackson Hole speech, said that the Fed would need to keep interest rates high enough to slow the economy “for some time” in order to curb high inflation. While tight monetary policy "for some time" will bring down inflation from its 40-year high, it means slower growth, a weaker job market and "some pain" for households and businesses.
According to the CME FedWatch tool, nearly half of market participants expect the Fed funds rate to end the year above 3.7%, up from 40% participants a week ago. The Fed has raised its benchmark federal funds rate by 0.75 percentage points at each of its last two meetings to a range of 2.25% to 2.5%.
Recession Risks
The yield curve inversion deepened when the 2-year yield rocketed significantly to its highest level since November 2007. This indicates recession warnings.
Additionally, bouts of weak economic data across the globe added to global slowdown fears. Economic activity in China, the world's second-largest economy, has been declining and the property sector is also suffering. Euro zone inflation for August also rose to another record high, solidifying the case for a hefty rate hike by the European Central Bank on Sep 8.
Historical Underperformance
September is historically the worst month for stocks. Since 1945, the S&P 500 has posted an average loss of 0.6% in September, the worst for any month, with the index advancing only 44% of the time, according to CFRA data. The decline is due to a seasonal phenomenon as investors are more prone to selling than buying when they return from their summer vacations, trading volume after Labor Day is mostly bearish, many mutual funds have fiscal years ending Sep 30, window-dressing is rampant, and investors generally sell stocks to pay tuition bills for their kids’ private schools and colleges.
ETFs Set to Shine
iShares MSCI USA Min Vol Factor ETF (USMV - Free Report)
iShares MSCI USA Min Vol Factor ETF offers exposure to the stocks that have historically declined less than the market during downturns by tracking the MSCI USA Minimum Volatility Index. iShares MSCI USA Min Vol Factor ETF holds 173 stocks in its basket, with none accounting for more than 1.7% of the assets. Information technology takes the top spot at 22.7%, while healthcare, consumer staples and industrials round off the next three spots (read: BlackRock Sees More Volatility Ahead: ETF Strategies to Follow).
With AUM of $27.7 billion, iShares MSCI USA Min Vol Factor ETF charges 15 bps in annual fees and trades in a solid average daily volume of 2.8 million shares. USMV has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
Invesco S&P 500 Low Volatility ETF (SPLV - Free Report)
Invesco S&P 500 Low Volatility 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 102 securities in its basket. Invesco S&P 500 Low Volatility ETF is widely spread across sectors, with utilities, consumer staples, and healthcare receiving double-digit exposure each.
Invesco S&P 500 Low Volatility ETF has amassed $11.3 billion in its asset base and trades in a solid volume of around 2.9 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.
Invesco S&P 500 High Dividend Low Volatility ETF (SPHD - Free Report)
Invesco S&P 500 High Dividend Low Volatility ETF offers exposure to 51 stocks traded on the S&P 500 Index that historically have provided high dividend yields and low volatility. It follows the S&P 500 Low Volatility High Dividend Index. Invesco S&P 500 High Dividend Low Volatility ETF is widely spread across sectors, with utilities, real estate, and consumer staples receiving double-digit exposure each.
Invesco S&P 500 High Dividend Low Volatility ETF has amassed $3.9 billion and charges 30 bps in annual fees. The fund trades in an average daily volume of 1 million shares (read: Play Dirt-Cheap Dividend ETFs to Fight More Fed Rate Hikes).
Invesco S&P MidCap Low Volatility ETF (XMLV - Free Report)
Invesco S&P MidCap Low Volatility ETF offers exposure to the mid-cap securities from the S&P MidCap 400 Index with the lowest-realized volatility over the past 12 months. It follows the S&P MidCap 400 Low Volatility Index and holds 81 securities in its basket. Invesco S&P MidCap Low Volatility ETF is widely spread across sectors, with financials, industrials, utilities and real estate receiving double-digit exposure each.
Invesco S&P MidCap Low Volatility ETF has AUM of $1.2 billion and charges 25 bps in annual fees. XMLV trades in an average daily volume of about 54,000 shares.
Invesco S&P SmallCap Low Volatility ETF (XSLV - Free Report)
Invesco S&P SmallCap Low Volatility ETF offers exposure to small-cap securities from the S&P SmallCap 600 Index with the lowest realized volatility over the past 12 months. It follows the S&P SmallCap 600 Index and holds 121 stocks in its basket. Invesco S&P SmallCap Low Volatility ETF is also widely spread across sectors, with financials, real estate, and industrials receiving double-digit exposure each (read: Should You Buy Small Cap ETFs Now?).
Invesco S&P SmallCap Low Volatility ETF has amassed $739.1 million and trades in volume of 57,000 shares per day on average. The product charges 25 bps in annual fees.
Bottom Line
These products could be worthwhile for low-risk-tolerance investors and have the potential to outperform the broad market, especially if trade fears and the historically weak month continue to dent sentiments.