Low volatility ETFs are increasingly popular as the market climbs its wall of worry. But those ETFs have had to change their holdings during the pandemic. More on that below. But first, what exactly are low volatility ETFs? 

They are equity funds that only hold stocks with below-average volatility. For example, the Invesco S&P 500 Low Volatility Portfolio (SPLV) holds the 100 stocks in the S&P 500 that exhibited the lowest volatility over the previous year. Such funds are helping nervous investors re-enter the stock market.

Because of COVID-19 market behavior has changed. For example, the typically boring utility stocks have made larger moves, both up and down, than the S&P 500. That’s because of concerns about falling power demand and the worry that people won’t be able to pay their bills.

At the same time, the traditionally volatile technology stocks that power the Nasdaq 100 index have acted as defensive plays. The only volatility they’ve seen is to the upside. Unlike some other industries, employees at technology firms remain productive even as they work from home.

As the volatility for these sectors has changed, so have the holdings for SPLV. Last May this ETF reduced its utilities weighting and added holdings like Amazon and eBay. The utilities sector was once a quarter of the portfolio, now it’s just 5.5%. Technology has a 9% weighting. The largest sectors are Healthcare (25%) and Consumer Staples (22%).

What are its largest stock holdings? They are Verizon, Clorox, eBay, Amazon, and Cerner. Verizon and Clorox are historically conservative, but it wasn’t until COVID-19 that investors considered Amazon and eBay to be defensive. They were anything but in 2000-02 after the internet bubble burst.

Another low volatility ETF is the iShares USA Min Vol Factor ETF (USMV). Technology holdings represent 22% of its portfolio while Healthcare is 16%. It’s largest stock holdings are Nextera Energy, T Mobile, McDonalds, Microsoft, and Verizon.

It’s very unusual to see so many technology stocks in low volatility ETFs. I’m concerned these ETFs might be riskier than what investors believe. For now, technology is doing exceptionally well.

There will be a time, however, when the more traditional utilities sector returns as a large holding. Low volatility ETFs can play an important role in portfolios, but investors should periodically look at their sector weightings to understand what they are holding.