2 Low Risk ETFs To Watch As Global Market Totters

Although the U.S. markets are still near their all-time highs, several cracks appear in the global growth story. Stocks have experienced some uncertainty of late and volatility has resurfaced as a concern. The market continues to focus on the rate-rising speculation in the U.S., deflationary worries in Europe and a stronger U.S. dollar.

Several corners of the equity market have witnessed modest sell-offs with the Dow and the S&P slipping into the red as investors were worried about going over the ledge, and opted low volatility products instead. 

While a six-and-half low U.S. unemployment data perked up the earlier-than-expected U.S. rate hike concerns, on the other side of the pond, the start of the QE program by the ECB took the greenback to a 12-year low against the euro. Asian stocks too dipped to a two-month low subsequent to opposing policies in two continents. Gold plunged to a three-month low and most risky assets across the globe were hard hit (read: Inside the Collapse of Gold Mining ETFs).

In short, uncertainty has taken the centre stage. Unless the Fed announces the exact date of its first rate hike after 2006, the Euro zone shows clear signs of improvement, the Japanese economy exhibits a steady growth profile and last but not the least, the oil price fully recoups, volatility will likely be the only constant factor  in this market (read: 3 ETFs to Watch on Rising Rates).

As markets may turn out to be wild progressing into 2015, investing in low volatility stocks may provide some hedge to the portfolios. Investors who bet on low volatility products in an uncertain market can make profits above their higher volatility peers. Low volatility ETFs tend to diminish risk and generate decent returns for investors (read: Hedge Your Portfolio with Low Volatility ETFs).

Low volatility ETFs generally include those stocks in their portfolio that have shown more stability in the past and have experienced the least in movement. Buoyed by this theme, two low volatility ETFs have returned investors smartly and outperformed even the broader U.S. ETF SPDR S&P 500 ETF (SPY). Below we have highlighted these two products in detail.

VelocityShares Equal Risk Weighted Large Cap ETF (ERW)

ERW tracks the VelocityShares Equal Risk Weighted Large Cap Index. The Index uses a methodology to measure a stock’s risk and then distributes the risk in each of its stock equally by weighing their risk exposure individually.

The Index comprises most of the S&P 500 Index stocks, but individual exposure depends on their expected risk. The stocks with lower expected risk will account for a percentage of the Index that is larger than in the S&P 500. This overlooked fund has managed to amass an asset base of nearly $2.6 million.

The fund charges a fee of 65 basis points annually and has returned 5.43% so far this year (as of March 10, 2015) while SPY added about 1.4% during the same time frame. ERW has a Zacks ETF Rank #3 (Hold).
 

iShares MSCI Japan Minimum Volatility ETF (JPMV)

Tailwinds came for Japanese stocks from the end of 2014 after Bank of Japan (BoJ) expanded its massive monetary policy and prime minister Shinzo Abe delayed the second consumption tax hike. The move freed the world's third-largest economy from a technical recession in the final quarter of the year and also triggered a stock market rally (read: 3 Country ETFs Scaling New Heights in 2015).

However, investors should note that though Japan broke free from the recession, its Q4 growth fell short of the market expectation. Wage growth has also been falling behind inflation pointing to the fact that the economy is yet to go a long way. Probably, this is the reason why a low volatility bet on the Japanese stocks are seeing success this year as evident from JPMV’s 10% gains in the year-to-date frame.

The fund offers exposure to 157 Japanese stocks having lower volatility characteristics relative to the broader Japanese equity markets by tracking the MSCI Japan Minimum Volatility Index. The fund is widely spread across a number of securities as none of these holds more than 2.19% of assets. The ETF is too overlooked by investors as depicted by AUM of $11 million. The fund charges 30 bps in annual fees and has a Zacks ETF Rank of 3.