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4 Low Volatility ETF Plays for a Rocky Market

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The start of the fourth quarter has been rocky for the global stock market, which is trapped in a vicious circle of woes.

Yields are rising with 10-year U.S. Treasury yields climbing the highest level in more than seven years buoyed by booming domestic economy and inflation fears. This has taken a toll on investors’ appetite for U.S. equities, which has been outperforming international equities this year. The S&P 500 fell nearly 1% last week, marking its worst weekly performance since the week of Sep. 7 (read: U.S. Yields Rise to Multi-Year High: ETFs to Gain & Lose).

Moreover, the steep sell-off in Chinese equities has made investors jittery. The decline came despite the People's Bank of China (PBOC) efforts to spur economic growth by cutting the reserve requirement ratios (RRRs) by 100 basis points effective Oct. 15. Notably, the Shanghai and Shenzen indexes dropped 3.7% in today’s trading session. Further, political turbulence in Italy added to the woes as the war of words between Rome and the European Union over the country’s budget escalated. Italy’s stock market fell to its lowest since April 2017 in today’s trading session.

If these weren’t enough, intensified U.S.-China trade war, the ongoing troubles in emerging markets, chances of auto tariffs on other countries, Iran oil sanctions, another budget deadline and the mid-term election in November are also weighing on global stocks.

Amid the uncertainties, the dual tailwinds of strong corporate earnings and a booming economy will continue to keep the positive momentum in the stock market alive albeit at a slower pace. As a result, investors may want to remain invested in the equity world but at the same time seek protection from a downside. This could be easily achieved by investing in low volatility products.

Why Low Volatility?

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 are allocated primarily to defensive sectors that usually have a higher distribution yield than the broader markets (read: Here's Why Low Volatility ETFs Will Outperform in September).

As such, we have presented four ETFs that could be solid options for investors in the current choppy market.

iShares Edge MSCI Min Vol USA ETF USMV

This fund offers exposure to 205 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 across a number of securities with none holding more than 1.60% of assets. From a sector look, information technology, health care, and consumer staples take the top three spots with a double-digit allocation each. With AUM of $16.7 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 (read: Trump's Tariff Threat Put Trade Talks at Risk: ETFs to Buy).

iShares Edge MSCI Min Vol EAFE ETF EFAV

This fund offers exposure to stocks in Europe, Australia, Asia and the Far East with potentially less risk. It follows the MSCI EAFE Minimum Volatility (USD) Index, charging investors 20 bps in annual fees. Holding 274 securities, the fund is highly diversified, with none making up for more than 1.55% share. Consumer staples, financials, health care and industrials occupy the double-digit exposure in the basket. In terms of country profile, Japan takes the top spot at 28.8%, followed by Switzerland (13.4%) and United Kingdom (12.3%). EFAV has AUM of $8.7 billion and trades in good volume of 443,000 shares a day on average. It has a Zacks ETF Rank #3 with a Low risk outlook.

Invesco S&P 500 Low Volatility ETF SPLV

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 less than 1.3% of assets. Utilities, real estate, financials and information technology make up the top four sectors with a double-digit allocation each. The fund has amassed $7.6 billion in its asset base and trades in heavy volume of nearly 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 (read: Low Volatility ETF Hits New 52-Week High).

iShares Edge MSCI Min Vol Global ETF (ACWV - Free Report)

This product offers exposure to global stocks that have lower volatility characteristics relative to the broader developed and emerging equity markets. Holding 418 stocks in its basket, it is well diversified with each accounting for less than 1.5%. Health care, information technology, financials, consumer staples, and industrials are the tops sectors with a double-digit allocation each. American firms dominate the fund’s portfolio at 57.6% followed by Japan (12.3%). ACWV has AUM of $3.3 billion and average trading volume of nearly 142,000 shares. It charges 20 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, protecting the initial investment. In particular, these products could be worthwhile for low risk-tolerant investors looking to safeguard their portfolio in the current market environment and seeking outperformance.

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