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Here's Why Low Volatility ETFs Will Outperform in September

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Albeit a booming domestic economy, Wall Street started September on a weak note on lingering trade uncertainty. The sluggish trend is likely to continue this month given a number of headwinds and the historical underperformance.

Meanwhile, the CBOE Volatility Index, also known as fear gauge, spiked as much as 9.5% on the first day of September. This suggests that market fears have started to set in. This fear gauge tends to outperform when markets are falling or fear levels over the future are high.

Trade Tensions

Trade between the United States and China remained an overhang on the stocks. Both the countries already implemented the second round of tariffs on $16 billion of each other’s goods, effective Aug 23. Trump is looking to implement tariff for another $200 billion in Chinese goods as soon as a public-comment period concludes this week (read: Low-Risk ETFs Taking Off on Rising Tariff Threats).

Trade talks with Canada failed to reach a consensus last Friday and Trump threatened to dump Canada from the revamped NAFTA deal proposed between the United States and Mexico. However, talks are expected to resume today.   

Other Headwinds

The ongoing troubles in emerging markets have kept investors on the edge. The crises deepened after Indonesia’s rupiah tumbled to the weakest against the dollar since the Asian financial crisis and news surfaced that South Africa’s economy has slipped into recession.

Chances of auto tariffs on other countries, Iran oil sanctions, another budget deadline, and the presidential midterm election in November are also likely to hit the stocks in the coming weeks.

Historical Underperformance

September is historically a weak month for the stock market. According to data from "Stock Trader's Almanac,” September has been the worst month for the Dow Jones Industrial Average and the S&P 500 since 1950 with average declines of 0.7% and 0.5%, respectively. The Nasdaq Composite, which was introduced in 1971, also dropped 0.5% on average. The month is also the toughest for the Russell 1000 and Russell 2000 indices since 1979 (read: Scared of a September Lull? Play 6 ETFs).

The declines are because of seasonal phenomenon. This is especially true as investors are more prone to selling than buying when they return from their summer vacations; increased trading volume after Labor Day is bearish; many mutual funds have fiscal years ending on Sep 30; window-dressing is rampant; and investors generally sell stocks to pay tuition bills for their kids’ private schools and colleges.

Further, midterm election leads to higher losses in September. Per Almanac data, the Dow Jones and Nasdaq's average losses for September widened to 1% and 0.8%, respectively, in midterm election years while S&P 500 losses improved slightly to an average of 0.4%.

Against such a backdrop, those seeking to remain invested in the equity world could consider low-risk ETFs by picking low volatility products.


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.

Below we have presented 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 206 U.S. stocks having lower volatility characteristics than the broader U.S. equity market by tracking the MSCI USA Minimum Volatility Index. It is well spread out across a number of securities, with none holding more than 1.62% of assets. From a sector look, information technology, healthcare, consumer staples and financials take the top four spots with a double-digit allocation each. With AUM of $16.2 billion, the product charges 0.15% in expense ratio and trades in solid average daily volume of 1.5 million shares. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

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 with none accounting for more than 1.23% of assets. Utilities, real estate, financials and information technology make up the top four sectors with a double-digit allocation each. SPLV has amassed $7.4 billion in its asset base and trades in heavy volume of more than 1.3 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 423 securities in its basket, with none accounting for more than 0.81% of assets. Financial services, consumer discretionary and producer durables are the top three sectors with a double-digit allocation each. The ETF has AUM of $478.2 million and charges 20 bps in annual fees. It trades in average daily volume of about 2,000 shares and has a Zacks ETF Rank #3.

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 126 stocks in its basket, it is well spread across components, with none holding more than 4.83% share. From a sector look, the ETF is skewed toward the information technology sector at 26% while financials, healthcare, and consumer discretionary round off the next three spots with a double-digit allocation each. The fund has been able to garner just $78.9 million in AUM so far and average daily volume is also low at 19,000 shares. FDLO charges 29 bps in annual fees from investors (read: Low Volatility ETF Hits New 52-Week High).

SPDR SSGA US Large Cap Low Volatility Index ETF (LGLV - Free Report)

This product tracks the SSGA US Large Cap Low Volatility Index, holding 147 stocks, with each accounting for less than 1.6% of assets. Financials dominates the fund’s returns with one-fourth share, while information technology and industrials receive double-digit exposure each. LGLV has amassed $116 million in its asset base and charges 12 bps in annual fees. Volume is paltry, exchanging 5,000 shares in hand on average.

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 historically weak month continue to dent sentiments.

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