3 Specialized ETFs For Conservative Investing


In the universe of exchange-traded funds, I have been finding more and more oddball funds that catch my attention. In general, one should be wary of any ETF that isn’t of the straight-ahead variety. Some sound interesting and potentially rewarding at first, but when you dig in, you find the strategy isn’t sound, or they charge too much.

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I found three ETFs that seemed to offer up some conservative strategies that one might normally get only if invested in a hedge fund or with a wealth manager. These fit the bill of having unique approaches for conservative investors, and for those interested in hedging a long or short position.

I’m actually doing my due diligence right now, as I write, so we can learn together about these ETFs and you can also get a sense of my initial “quick and dirty” method for seeing if an investment is worth doing further diligence on.

Here are three specialized ETFs for conservative investing:

3 Specialized ETFs For Conservative Investing: PowerShares S&P 500 Low Volatility (SPLV)

The PowerShares S&P 500 Low Volatility (SPLV) is the most mainstream of these choices, mirroring the performance of the 100 least volatile stocks in the S&P 500. Originally misconceived as a utility fund, this is actually a fairly diverse ETF holding a lot of stocks that aren’t moving very much relative to the broad market. Its top 10 holdings are:

Stericycle  SRCL Industrials
Procter & Gamble PG Consumer Staples
AT&T Inc T Telecommunication Services
XL Group  XL Financials
CVS Health Corporation CVS Consumer Staples
People’s United Financial  PBCT Financials
McCormick & Company MKC Consumer Staples
Marsh & McLennan  MMC Financials
Allstate  ALL Financials
Republic Services RSG Industrials

None of these will blow your doors off, but that’s not the point. The point is slow and steady with no excitement. I would expect this ETF to lag the broad market, which it does, but you get less volatility — which is presumably the point.

3 Specialized ETFs For Conservative Investing: IQ Hedge Multi-Strategy Tracker ETF (QAI)

The IQ Hedge Multi-Strategy Tracker ETF (QAI) is more complex. It describes itself as replicating “the risk-adjusted return characteristics of the collective hedge funds using various hedge fund investment styles, including long/short equity, global macro, market neutral, event-driven, fixed income arbitrage and emerging markets.”

It sounds exotic, but when you see what it holds, you realize it really isn’t much different than a bond fund, with some broad market equity ETFs, and about two dozen shorts that account for a 30% short position to offset the 130% long position. The result is a true hedge against the market, returning 18.5% since inception in 2009 against the S&P 500’s 60%.

Look at the top five holdings:

Vanguard Short-Term Bond ETF BSV 19.2%
Vanguard Total Bond Market ETF BND 15.1%
IShares Barclays Aggregate Bond Fund AGG 14%
IShares Barclays 1-3 Year Treasury Bond SHY 10.5%
SPDR Barclays Capital Convertible Securities ETF CWB 9.7

3 Specialized ETFs For Conservative Investing: IQ Real Return ETF (CPI)

Finally, we have the IQ Real Return ETF (CPI). The plan here is to provide a return above the rate of inflation as measured by the consumer price index. You would therefore expect a whole lot of short-term bonds in this fund, which it has, but it also has a little bit invested in the S&P 500 and — oddly — invests in the British pound.

iShares Barclays Short Treasury Fund SHV 39.5%
SPDR Barclays Capital 1-3 Month T-Bill ETF BIL 23.4%
SPDR S&P 500 ETF SPY 10.1%
Currencyshares British Pound FXB 9.4%
iShares 1-3 Year Treasury Bond SHY 7.5%

There’s just one problem with this fund. If you subscribe to my theory that the government is flat-out lying about the inflation rate and that real inflation is closer to what the Chapwood Index provides, then you aren’t really hedging against anything.

As of this writing, Lawrence Meyers does not hold a position in any of the aforementioned securities.

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