Four Low-Volatility ETFs to Hedge Your Portfolio

Zacks Investment Research
  OCT 23, 2012 2:05 PM

Some allocation to low-volatility stocks and ETFs in a portfolio will be beneficial to investors.


Third quarter results reported so far are lackluster in most cases and disappointing in many. Adding to the woes are the bleak guidance for the fourth quarter and beyond provided by a large number of companies.

On the other hand, recent US economic data has been largely positive, particularly in the areas of housing and consumer confidence. Improving macro picture and the central banks’ support will continue to make the market somewhat resilient.

And while China is showing some signs of bottoming out, the outlook for the eurozone is still very cloudy.

Further, in view of a very close presidential race and the looming fiscal cliff, the investors are hesitant to make any big moves in the market.

The market may thus continue to be volatile in the coming weeks. The investors should therefore look at some of the low-volatility ETFs that are ideal for such stormy markets as these products reduce the portfolio volatility and limit the downside risk.

Many academic studies have shown that low-volatility stocks outperform the broader market over longer period and they consistently deliver better risk-adjusted returns.

Low-volatility ETFs are suitable not only for short-term but also for longer-term as the volatility in the financial markets is expected to stay at elevated levels compared to historical levels, given extraordinary macroeconomic conditions prevailing for the past few years and  unconventional monetary tools employed by the central banks all over the world.

Thus some allocation to low-volatility stocks and ETFs in the portfolio will be beneficial to the investors. We may however add that these ETFs will lag the broader market in strong bull periods.

PowerShares S&P 500 Low Volatility (NYSEARCA:SPLV) (SPLV)

SPLV tracks the S&P 500 Low Volatility Index (INDEXSP:SP500LVOL), which consists of 100 stocks from the S&P 500 Index (INDEXSP:.INX) with the lowest realized volatility over the past 12 months.

ETF currently has an attractive 30 day SEC yield of 3.00%, while it charges an expense ratio of 0.25% per year. The fund was launched in May last year and has proved to be extremely popular with the investors as it has already garnered about $2.6 billion in assets. The ETF holds 100 securities currently, mostly from the Consumer Staples (30.9%), Utilities (29.2%) and Healthcare (14.7%) sectors. The ETF has returned 11.73% year-to-date.

iShares MSCI USA Min Volatility (NYSEARCA:USMV)

USMV seeks to replicate the MSCI USA Minimum Volatility Index, which is comprised of US securities in the top 85% market cap that have lower absolute volatility. The underlying index begins with MSCI USA Index, which is a capitalization-weighted index, and then follows a rules-based methodology to determine weights for securities in the index.

The fund charges a very low expense ratio of 15 basis points annually while the 30 day SEC yield is 2.66% currently. Heath Care (17.2%), Consumer Staples (15.7%) and Information Technology (14.4%) are the top three sectors.  

The fund was launched in October last year and has attracted $465.1 million in assets so far, which are invested in 123 securities. It has returned year-to-date.

iShares MSCI All Country World Minimum Volatility Index Fund (NYSEARCA:ACWV)

ACWV is ideal for investors looking for low-volatility product with global exposure. It tracks MSCI All Country World Minimum Volatility Index, which is a capitalization weighted index of securities in the developed and emerging economies that have lower absolute volatility. The weight of the stocks in the index is determined by a rules based methodology.

The ETF holds 264 securities which are mainly invested in Consumer Staples (15.4%), Healthcare (14.4%) and Financials (13.7%) sectors.

ACWV has an expense ratio of 0.35% and a 30 day SEC yield of 3.87% currently. The fund invests about 53% of its assets in US securities while Japan (13%) and Canada (7%) occupy the next two spots in terms of country exposure.

The fund was launched in October last year and has collected $639.0 million in assets so far. It has returned 10.22% year-to-date.

iShares MSCI Emerging Market Minimum Volatility Index (NYSEARCA:EEMV)

EEMV is an ideal choice for the investors looking to participate in the emerging markets growth while limiting their portfolio volatility. No wonder it has proved to be one of the most popular emerging market ETFs, since its launch in October last year.

The ETF holds 213 securities from the Financials (25.7%), Consumer Staples (13.7%) and Telecom (13.7%) sectors. Taiwan (15.3%). China (13.1%) and South Korea (10.5%) are the top countries in terms of exposure. The fund charges a low expense ratio of 25 basis points (after contractual waiver of certain expense through end of 2014) while the 30 day SEC yield is 3.07%. It has rewarded the investors with an attractive 17.2% return till date this year.

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No positions in stocks mentioned.