This year, investors are hearing plenty about market volatility. That probably explains why low-volatility exchange-traded funds are packing on the assets while ranking as some of 2016’s best ETFs.
With China’s economy slumping, lingering questions about the veracity of the recoveries in certain corners of the U.S. economy, ongoing speculation about the Federal Reserve’s monetary policy and a slew of other factors, investors could be faced with more volatility in the months ahead.
Volatility and down markets are not always synonymous, but investors often see things that way. Fortunately, there are some ETFs that can help investors weather the storm should market turbulence come calling again.
Along those lines, investors should note that not all of the best ETFs for dodging are heavy on consumer staples and utilities stocks, the sectors historically favored by conservative investors when volatility spikes.
Of course, some of the best ETFs for skirting topsy turvy markets are more traditional in their approaches. With that in mind, let’s have a look at three of the best ETFs to own if stocks go haywire.
Best ETFs for Stability: PowerShares S&P MidCap Low Volatility Portfolio (XMLV)
Expense Ratio: 0.25% per year, or $25 for every $10,000 invested
Chances are,if you’ve actively been considering low-volatility ETFs, you’ve at least head of the PowerShares S&P 500 Low Volatility Portfolio (SPLV). Well, consider the PowerShares S&P MidCap Low Volatility Portfolio (XMLV) the mid-cap equivalent of SPLV.
Where SPLV pulls the 100 least volatile S&P 500 stocks based on trailing-12-month volatility, XMLV does that with 80 members (XMLV currently holds 78 stocks) of the S&P MidCap 400 Index. So while XMLV is not reinventing the low-volatility ETF wheel, it is one of the best ETFs for dodging volatility because it allows investors to maintain diversified portfolios and avoid being over-allocated to large- and mega-cap fare.
XMLV also makes sense for investors who already have allocations to consumer staples stocks, as that sector is the ETF’s smallest at 1.4%. Conversely, XMLV allocates nearly half its weight to financial services names and another 15.7% to the utilities sector.
Investors looking for mid-cap purity might be surprised to learn XMLV devotes over 28% of its weight to small caps, a situation likely to be rectified upon the ETF’s next rebalance. Still, it is hard to quibble with XMLV being one of the best ETFs because year-to-date and over longer periods, the ETF is thumping traditional mid-cap funds.
Best ETFs for Stability: iShares Select Dividend ETF (DVY)
Expense Ratio: 0.39% a year
Home to $15.1 billion in assets under management, DVY is one of the largest U.S. dividend ETFs. Beyond heft, DVY has also been one of this year’s best ETFs of any variety, with a gain of more than 11%.
Explaining DVY’s exceptional performance this year is easy: This is one of the best ETFs in the current environment because of its nearly 32% weight to utilities stocks, this year’s best-performing sector. On the other hand, DVY’s utilities weight, one of the largest among ETFs that aren’t dedicated utilities funds, is a blessing and a curse.
DVY is being blessed right now because the Federal Reserve refuses to raise interest rates. If the Fed changes course, DVY could be briefly vulnerable. However, DVY is still a best ETF pick for dodging volatility due to a three-year standard deviation of just over 10%.
Best ETFs for Stability: iShares Edge MSCI Min Vol EAFE ETF (EFAV)
Expense Ratio: 0.2% per year
Just as investors don’t need to be exclusively devoted to large-caps to endure volatility, they do not need to be married to U.S. stocks. The iShares Edge MSCI Min Vol EAFE ETF (EFAV) is one of a slew of ex-U.S. low-volatility ETFs on the market, and one of the best ETFs for investors looking to add developed market exposure.
EFAV tracks the MSCI EAFE Minimum Volatility (USD) Index, the low volatility equivalent of the widely followed MSCI EAFE Index. While past performance isn’t guaranteed to repeat, it cannot be ignored that over the past five years, EFAV is up 24%.
Clearly, EFAV is one of the best ETFs in the low-volatility ex-U.S. genre. EFAV allocates over 52% of its weight to Japanese and U.K. stocks. Financial services, consumer staples and healthcare names combine for about 54% of the ETF’s weight.
At the time of this writing, Todd Shriber did not own any of the aforementioned securities.