Were you at your desk when the Dow Jones Industrial Average hit 17,000?
If so, you were in the minority.
Dow 17k came on extremely low volume — part and parcel of the July-August stretch of the year when market volume tends to stumble into the basement.
On its own, low volume isn’t all that bad. But when mixed with several potentially explosive story lines — tensions rising between Israel and Hamas, Ukraine focusing its military efforts on Donetsk, Typhoon Neoguri blasting Japan — it’s time to worry about volatility, too.
Because in a low-volume market, it doesn’t take much to move the needle. One bullish piece of economic data becomes a little more likely to juice Wall Street, and one bearish piece of corporate news gains a lot more potential to derail an industry, or even the broader markets.
Not to mention, short-term volatility can wreak havoc on investors from a psychological standpoint. Quick, irrational losses can spark panic selling in untested investors at the very time a patient, steady hand is called for.
Thus, one of the best things you can do for some financial peace of mind is hunker down in a few safe, sensible funds that will get you through tumultuous times … and also help you build toward the future when the markets are back to a smooth glide upward.
For my part, I typically invest in exchange-traded funds, so let’s look at some of the best ETFs to keep you safe and profitable through most any season:
Best ETFs – PowerShares S&P 500 Low Volatility Portfolio (SPLV)
The PowerShares S&P 500 Low Volatility Portfolio (SPLV) is one such product, giving you the broad coverage of the S&P 500, but focusing on the stocks “with the lowest realized volatility over the past 12 months.”
In short, when the markets wiggled over the past year, for better or worse, these stocks barely budged.
The upside to this? You’re looking at a murderer’s row of defensive stalwarts. Utilities make up nearly a quarter of the fund, as well as double-digit weightings in both industrials and consumer staples. You’re most heavily weighted in Walmart (WMT), McDonald’s (MCD), UPS (UPS) — companies that aren’t going to drop off a cliff. This composition results in a beta of just 0.5 — so given that it shares most of the same holdings as the S&P 500, it’s correlated with the market, just not nearly as volatile.
The downside to this? The returns aren’t as grand. The relatively young SPLV has a total return of 36% in the past two years — not bad, but also not nearly as great as the 52% return from the S&P 500-tracking Vanguard S&P 500 ETF (VOO).
SPLV is very much a safety-over-performance play, and at 0.25% in expenses — or $2.50 for every $1,000 invested — it’s not a bad one for conservative investors. That said, I prefer this next pick…
Best ETFs – Vanguard S&P 500 ETF (VOO)
As I mentioned before, the SPLV is a decent pick if you’re terrified of volatility and really want to duck into a bunker. But realistically, the broader market itself tends to do pretty well for itself in just about every environment short of a straight-up market crash.
If you’re on board with me there, I’d just suggest buying the Vanguard S&P 500 ETF (VOO). There are two other low-cost S&P 500 trackers — the iShares S&P 500 ETF (IVV) and, of course, the SPDR S&P 500 ETF (SPY) — but why haggle on price? Just pick the lowest-cost one of the bunch (the VOO, at 0.05%) and get on with your life.
After all, if Vanguard’s S&P 500 products are good enough for a Warren Buffett mention, they’re good enough for this schlub.
Best ETFs – iShares Select Dividend ETF (DVY)
One thing to note about “dividend ETFs” is that they actually don’t yield any more in dividends than the S&P 500. The Vanguard Dividend Appreciation ETF (VIG), for instance, only yields 1.9% to the S&P 500’s 1.8%.
Granted, the VIG is still useful; targeting companies that have consistently increased dividends is a great measure of stock quality. But if you’re looking toward cash dividends as a means of stability and security, your better bet is a fund like the iShares Select Dividend ETF (DVY).
The DVY gets you exposure to a pool of 100 American companies that have increased dividends for at least five years, and more important, it yields roughly 3% in dividends — more than a percentage point better than SPY or VIG — while also featuring a low beta of about 0.8.
DVY charges 0.39% in fees.
Best ETFs – SPDR S&P International Dividend ETF (DWX)
Obviously, it doesn’t hurt to diversify, and on a geographical front, that leads me to back the SPDR S&P International Dividend ETF (DWX).
There’s nothing clever here. The DWX is designed to comprise 100 or so global stocks with “high” dividend yields that meet certain basic criteria for quality, such as minimum market cap depending on region, daily trading values, earnings growth and profitability. Ergo, you’re not just getting yield, but quality corporations behind those dividends.
Country weightings are heaviest in Australia (22%), Canada (10%) and the United Kingdom (8%), followed by Germany, Finland and other developed European countries before funneling down to more emerging markets and Asian countries.
Top holdings? Unwieldy names such as ProSiebenSat.1 Media AG (PBSFY), a German media conglomerate, and Australia’s Worleyparsons, an engineering design and delivery company.
And if you’re looking for a little back-end padding, you have to love DWX’s 5.2% dividend yield to protect against any capital losses.
All for expenses of just 0.45%.
Best ETFs – iShares Core U.S. Aggregate Bond ETF (AGG)
That said, one great source of stable and dependable (albeit not spectacular) fixed income is the iShares Core U.S. Aggregate Bond ETF (AGG).
“But if it’s not spectacular, why bother?” Because they’re bonds. If you want spectacular returns, invest in biotech.
Anyway, the AGG puts you behind the wheel of more than 2,500 different U.S. investment-grade bonds, which includes a monster weighting in Treasuries (37%), as well as some Fannie Mae/Freddie Mac debt, corporate debt from issuers such as Bank of America (BAC) and Verizon (VZ) and other bonds.
Over the past 10 years, the biggest peak-to-trough difference (excluding the 2008-09 bottom) has been some 15%. That’s astoundingly low. Which means you shouldn’t expect massive capital gains out of AGG — just collect your 2.2% in yield for a little security, and hope inflation doesn’t go berserk.
At least you won’t get hit by expenses, which run a slight 0.08%.
Best ETFs – iShares S&P U.S. Preferred Stock Index Fund (PFF)
I love the iShares S&P U.S. Preferred Stock Index Fund (PFF).
You can read this story to learn more about preferred stocks, but the long and short of this particular security is that it’s a high-yielding “hybrid” that offers some traits of stocks, and some of bonds. For instance, you own equity in the company like you would with common stock, but preferreds also pay a fixed income much closer to bonds.
PFF takes all the guesswork out of things and exposes you to more than 300 preferred stocks from companies such as HSBC (HBC), Ally Financial (ALLY) and Barclays (BCS) — yes, PFF is financial-heavy — resulting in a sweet yield of about 6.6% currently on just 0.47% in fees.
I own PFF, and I’ll always own PFF (unless the stock market falls during the zombiepocalypse).
Best ETFs – iShares Core S&P Mid-Cap ETF (IJH)
The iShares Core S&P Mid-Cap ETF (IJH) seems out of place at first blush. After all, aren’t midcap stocks smaller names with less sturdy financials that are exposed to more volatility than big, blue-chip stocks?
But here’s the thing — midcap stocks actually outperform their large-cap brethren once you adjust for risk, while still featuring less volatility than smallcaps. This Principal Global Equities report breaks down some simple numbers from a 10-year period ending Dec. 31, 2012, if you’d like a better look — the point is that while midcap stocks certainly don’t exhibit zero volatility, they’re worth it, regardless of the season.
Expenses are light at 0.15%, which is more than evened out by the fund’s modest 1.2% dividend yield.