Low Volatility ETFs To Outperform: Here's Why

Mockup, Typewriter, Word, Money, Wall Street, Etf

Image Source: Pixabay


After a brutal August, Wall Street continued to show weakness at the start of September. Worries over longer-than-expected higher interest rates and a weakening Chinese economy have been playing foul on the stock market. Additionally, the historical underperformance in September added to the woes.

Against such a backdrop, investors seeking to remain invested in the equity world could consider low-volatility ETFs. These funds — iShares MSCI USA Min Vol Factor ETF (USMV - Free Report), Invesco S&P 500 Low Volatility ETF (SPLV - Free Report), Invesco S&P 500 High Dividend Low Volatility ETF (SPHD - Free Report), Invesco S&P MidCap Low Volatility ETF (XMLV - Free Report) and Invesco S&P SmallCap Low Volatility ETF (XSLV - Free Report) — could be solid options for investors in the current choppy market.

Low-volatility ETFs have the potential to outpace the broader market in bearish conditions or 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.


Higher Rate & China: Culprits

A raft of strong economic data kept alive fears of higher interest rates for a longer period. Federal Reserve Chair Jerome Powell, at the Jackson Hole Economic Symposium, expressed confidence in continued economic growth in the United States, citing “robust” consumer spending and early signs of a recovery in the housing market. However, the Fed warned that inflation is still too high and that the central bank is prepared to raise interest rates further and keep borrowing costs high until inflation comes down to the target range of 2%.

Meanwhile, China, the engine of global growth, is caught in deep trouble, given falling consumer prices, a deepening real estate crisis, slumping exports and a record-high youth unemployment rate.


September Effect

September is historically the worst month for the stock market. According to an analysis by Sam Stovall of CFRA Research, the S&P 500 has witnessed an average loss of 0.7% for the month since 1945.

The decline can be attributed to a seasonal phenomenon, as investors are more prone to selling than buying when they return from their summer vacations. Trading volume after Labor Day is mostly bearish. Many mutual funds have fiscal years ending Sep 30. Window-dressing is rampant and investors generally sell stocks to pay tuition bills for their kids’ private schools and colleges.

iShares MSCI USA Min Vol Factor ETF (USMV)

iShares MSCI USA Min Vol Factor ETF offers exposure to the stocks that have historically declined less than the market during downturns by tracking the MSCI USA Minimum Volatility Index. It holds 170 stocks in its basket, with none accounting for more than 2% of the assets. Information technology takes the top spot at 23.1%, while healthcare, financials and consumer staples round off the next three spots.

With AUM of $28.5 billion, iShares MSCI USA Min Vol Factor ETF charges 15 bps in annual fees and trades in a solid average daily volume of 2.2 million shares. USMV has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: 5 ETFs That Gained Investors' Love Last Week).

Invesco S&P 500 Low Volatility ETF (SPLV)

Invesco S&P 500 Low Volatility 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 102 securities in its basket. Invesco S&P 500 Low Volatility ETF is widely spread across sectors, with consumer staples, utilities, healthcare and financials receiving double-digit exposure each.

Invesco S&P 500 Low Volatility ETF has amassed $9 billion in its asset base and trades in a solid volume of around 2 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.

Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)

Invesco S&P 500 High Dividend Low Volatility ETF offers exposure to 51 stocks traded on the S&P 500 Index that historically have provided high dividend yields and low volatility. It follows the S&P 500 Low Volatility High Dividend Index. Invesco S&P 500 High Dividend Low Volatility ETF is widely spread across sectors, with utilities, real estate, consumer staples, materials and healthcare receiving double-digit exposure each.

Invesco S&P 500 High Dividend Low Volatility ETF has amassed $3 billion and charges 30 bps in annual fees. The fund trades in an average daily volume of 597,000 shares.

Invesco S&P MidCap Low Volatility ETF (XMLV)

Invesco S&P MidCap Low Volatility ETF offers exposure to mid-cap securities from the S&P MidCap 400 Index with the lowest-realized volatility over the past 12 months. It follows the S&P MidCap 400 Low Volatility Index and holds 82 securities in its basket. Invesco S&P MidCap Low Volatility ETF is widely spread across sectors, with industrials, real estate, financials and utilities receiving double-digit exposure each.

Invesco S&P MidCap Low Volatility ETF has AUM of $868.9 million and charges 25 bps in annual fees. XMLV trades in an average daily volume of about 50,000 shares.

Invesco S&P SmallCap Low Volatility ETF (XSLV)

Invesco S&P SmallCap Low Volatility ETF offers exposure to small-cap securities from the S&P SmallCap 600 Index with the lowest realized volatility over the past 12 months. It follows the S&P SmallCap 600 Index and holds 120 stocks in its basket. Invesco S&P SmallCap Low Volatility ETF is also widely spread across sectors, with real estate, industrials, financials and consumer staples receiving double-digit exposure each.

Invesco S&P SmallCap Low Volatility ETF has amassed $396 million and trades in a volume of 52,000 shares per day on average. The product charges 25 bps in annual fees.


More By This Author:

ETFs To Tap Oil Price Strength
Oil ETF (USO) Hits New 52-Week High
Apple ETFs In Focus Ahead of Iphone 15 Launch Event

My articles always describe aspects of an investment process I have been using since the 1970's, as described in my book, more

How did you like this article? Let us know so we can better customize your reading experience.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.