I’m not sure about you, but I’m getting seasick once again. After what seems like years of calm seas, the markets are back to their high-volatility days. In about two weeks, we’ve already seen some of biggest intra-day swings on ETFs like the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) since really the crisis and the start of the recession. For investors, the heightened volatility certainly makes for a stressful night’s sleep — especially if you’re in or near retirement.
But you don’t have to lose sleep over the market’s return to tsunami-like waves.
There are plenty of exchange-traded funds (ETFs) that allow investors to potentially smooth out their rides and cut through the volatility. By swapping out some of their “bouncier” fair for these ETFs, investors can significantly reduce drawdowns, while still participating in some of the market’s upside. And there’s plenty of research that shows that volatility is one of the biggest killers to long-term investment performance.
With that in mind, here are five ETFs that can help as the market’s return to their see-saw ways.
ETFs To Cut Through The Volatility: iShares Edge MSCI Min Vol USA ETF (USMV)
Expense Ratio: 0.15%, or $15 per $10,000 invested annually.
When it comes to fighting volatility, the newly rebranded iShares Edge MSCI Min Vol USA ETF (BATS:USMV) is the grand-daddy of them all. USMV currently has nearly $15 billion in assets. And for good reason.
As a smart-beta ETF, USMV uses various screens to kick out high-volatility stocks in order to capture the upside of the market, while eliminating the downside. The idea is that betting on stocks like Waste Management, Inc. (NYSE:WM) that have historically shown lower overall volatility will result in a smoother ride for portfolios. And so far, USMV has delivered on that promise.
For example, since its inception in November of 2011, USMV has managed to capture roughly 80% of the S&P 500’s gains, while only realizing about 49% of its loses. That gives the ETF a beta of 0.68 — which means it’s more than a quarter less volatile than the S&P 500 index. More importantly, long-term returns for USMV have been better than benchmark index as well.
For investors, USMV could be swapped for the core index holdings to provide the safety net that these volatile times require. And with its low expense ratio of 0.15% — or just $15 per $10,000 invested — the ETF is cheaper than many traditional index ETFs as well.
ETFs To Cut Through The Volatility: PowerShares S&P 500 Downside Hedged Portfolio (PHDG)
Expense Ratio: 0.39%
Predicting the drops, pops and how the day’s/week’s volatility will pan out is pretty much an impossible errand. No one wants to be tied to their brokerage account to play every little market move either. To that end, having a way to automatically shift between asset classes could be the best solution. And that’s what you get in the PowerShares S&P 500 Downside Hedged Portfolio (NYSEARCA:PHDG).
PHDG tracks the S&P 500 Dynamic VEQTOR Index — which is designed to provide excess returns in any market environment. It accomplishes this by holding equities, bonds, volatility futures and cash. The beauty is that PHDG’s allocation is not static. It’ll shift through these four asset classes as the market sentiment changes.
So, if volatility rises and the market starts to sour, the ETF will sell out of equities and load up on bonds, futures and cash. If things really go south, PDHG will hold only cash and VIX futures. The ETF will once again switch back to stocks when the coast is clear.
This provides a no brains and hands-off approach to the shifting market environment we’ve entered. In that, investors should be able to get some much-needed protection from high volatility and losses. And that protection is pretty cheap as well. Expenses for the ETF run at just 0.39%.
ETFs To Cut Through The Volatility: Goldman Sachs ActiveBeta International Equity ETF (GSIE)
Expense ratio: 0.25%
It’s not just U.S. stocks that are feeling the heat from high volatility. International stocks have also been rocked by rising market gyrations. And when you add in the effects of currency and stock exchanges/trading times that don’t exactly add up, you can have a very bumpy ride indeed.
The Goldman Sachs ActiveBeta International Equity ETF (NYSE:GSIE) could one of the best ETFs to tackle this problem head-on.
Like all smart-beta ETFs, GSIE uses various screens to comb the developed international world to uncover the best opportunities. Goldman Sachs highlights four metrics as being the best for investors. This includes good value, strong momentum, high quality and of course, low volatility. The combination of these four factors allows the ETF to hone in on the very brightest stars in the developing world. This includes stocks like the Royal Bank of Canada (NYSE:RY) and pharmaceutical giant Novo Nordisk A/S (ADR) (NYSE:NVO).
The strategy seems to be working. Over the last year, GSIE has managed to return 28.05%. That’s about 2% higher than regular market-cap weighted MSCI World ex-US Index.
For that market-beating performance, GSIE only charges a rock-bottom 0.25%.
ETFs To Cut Through The Volatility: Vanguard High Dividend Yield ETF (VYM)
Expense Ratio: 0.08%
When it comes to volatility fighting, one of the best tools continues to be a classic. We’re talking about dividends. Those steady streams of cash hitting your brokerage account help to mitigate portfolio losses when stock prices decline. And with that, dividend stocks often tend to be less volatile than their non-dividend paying counterparts over the long haul. Everyone wants that protection, so no one sells them off as much.
The Vanguard High Dividend Yield ETF (NYSEARCA:VYM) continues to be one of the best choices of dividend-seeking investors.
VYM tracks the FTSE High Dividend Yield Index — which is a portfolio of large-cap stocks that pay above-average dividends relative to the broader market. And don’t get hung up on the words “high-yield.” VYM isn’t chock full of dividend time-bombs and shoddy payers. You’re looking at strong dividend-leaders like Microsoft Corporation (NASDAQ:MSFT) and Johnson & Johnson (NYSE:JNJ).
By buying VYM and collecting its 2.7% 12-month yield, you’re already ahead of the game if volatility hits hard. Meanwhile, reinvesting those dividends allows you to dollar cost average your way through the strife in better condition.
All in all, VYM remains one of the best ETFs you can own and the volatility fighting ability is an added bonus.
ETFs To Cut Through The Volatility: iShares U.S. Preferred Stock ETF (PFF)
Expense Ratio: 0.47%
Another option for fighting some hefty volatility? Preferred stocks. Thanks to their dual bond and stock natures, preferred stocks tend to be less volatile overall than regular equities. That’s in part to their high dividends as well as the pair value they can be called for. This par value tends to act as a price floor for the hybrid security.
The $16.5 billion iShares U.S. Preferred Stock ETF (NYSEARCA:PFF) is still the kingpin class and has the most assets/largest trading volume of ETFs in the asset class.
PFF tracks the S&P U.S. Preferred Stock Index — which currently holds 302 different preferred stocks. That provides plenty of diversification and eliminates any potential dividend/payout breakdowns. As expected, financial stocks make up the largest percentage of PFF’s assets. The sector tends to be the biggest issuer of preferred shares. Energy and healthcare come in a very distant second and third.
As for volatility fighting, PFF has been pretty constant with its returns across the three-, five- and 10-year periods. This highlights the steady nature of the asset class. With a 5.5% 30-day SEC yield and low expense ratio, the ETF could be one of the best ways to get a decent return without the headache of a roller coaster ride.
Aaron Levitt did not hold a position in any of the aforementioned securities.