Stocks have been extremely volatile over the past few weeks, making investors nervous about the safety of their portfolios. Volatility is expected to stay at elevated levels as there are so many factors to worry about now including midterm elections, trade & tariff tensions, slowing global economy and peak earnings.
In this environment, investors could consider low volatility ETFs that tend to perform well in a volatile market environment. These ETFs underperform the broader indexes during strong bull markets but they 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 return than the broader markets over longer-term. Low-volatility anomaly was overserved in almost all stock markets around the globe.
Investors should however remember that these ETFs have not been tested so far in major market crashes. Further, if too many investors chase the same stocks, they could become expensive and also more volatile.
To learn more about the iShares MSCI USA Min Volatility (USMV - Free Report) and the PowerShares S&P 500 Low Volatility (SPLV - Free Report) , including their recent performance, please watch the short video above.
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