Oct. 10 and Oct. 11, 2018 will not be remembered fondly by equity investors. The tenth month of the year has a reputation for delivering some shocks to equity markets and while October 2018 probably will not turn out like Octobers in 1929 or 1987, the fact is, stocks have been drubbed the past two days.
Over those two days, the Nasdaq-100 Index lost 4.40% and 1.25%, respectively, while the Dow Jones Industrial Average shed more than 1,300 points combined. As of the close of U.S. markets on Oct. 11, the S&P 500 was saddled with a weekly loss of 4.60%.
Among exchange-traded funds (ETFs), departures have recently been widespread with investors yanking money from a variety of equity and fixed income funds. If history is a guide, pullbacks within bull markets are not the time for investors to panic. Low volatility ETFs can help investors stay engaged with stocks during tumultuous times.
A perk of low volatility ETFs is that these funds are designed to endure lower drawdowns when stocks decline, but the rub is that they do not capture all the upside delivered in strong trending bull markets. Here are some of the low volatility ETFs to consider right now.
PowerShares S&P 500 High Dividend Low Volatility Portfolio (SPHD)
Expense Ratio: 0.30%
The PowerShares S&P 500 High Dividend Low Volatility Portfolio (NYSEARCA:SPHD) is a low volatility ETF with a dividend kicker, making it ideal for conservative income investors when equity market volatility spikes.
SPHD targets the S&P 500 Low Volatility High Dividend Index, which is home to the 50 S&P 500 stocks with the lowest trailing 12-month volatility and highest dividend yields. That combination leads to large weights to sectors viewed as sensitive rising interest rates. This low volatility ETF dedicates nearly 37% of its combined weight to the rate-sensitive utilities and real estate sectors.
While those sector exposures cannot be glossed at a time when 10-year yields are moving higher, SPHD is living up to its billing as a better option than traditional equity ETFs when volatility increases. That much is confirmed by this low volatility ETF’s significantly less bad performance than the S&P 500’s over the past week.
iShares Edge MSCI Min Vol USA ETF (USMV)
Expense Ratio: 0.15%
The iShares Edge MSCI Min Vol USA ETF (CBOE:USMV) is the largest low volatility ETF trading in the U.S. USMV, which turns seven years old in a few days, follows the MSCI USA Minimum Volatility (USD) Index, a benchmark that separates this low volatility ETF from some rival funds.
Sector attribution separates USMV from competing low volatility ETFs. This low volatility ETF allocates over 35% of its combined weight to the technology and healthcare sectors. Healthcare is viewed as a defensive group, but technology usually is not, making USMV’s 19.70% technology weight unique among low volatility ETFs.
That presents some risk when technology is among the worst offenders when broader markets decline, as has been the case this week. Still, USMV is holding up better than traditional equity benchmarks and is one of the best-performing low volatility ETFs over long holding periods.
WisdomTree U.S. Multifactor Fund (USMF)
Expense Ratio: 0.28%
The WisdomTree U.S. Multifactor Fund (CBOE:USMF) is unique among the low volatility ETFs highlighted here for a simple reason: It is not a dedicated low volatility ETF. As its name implies, USMF is a multi-factor fund. USMF is also unique on that front because while most multi-factor funds feature exposure to three or more investment factors, USMF focuses on value and quality.
Still, USMF has credibility as a low volatility ETF. More importantly, it has the potential to offer investors better returns than traditional reduced volatility strategies.
“Typical single-factor low-volatility portfolios tend to naively over-weight the lowest-volatility stocks in the investment universe, resulting in significant deviations in active weight while not providing differentiated stock selection,” said WisdomTree in a recent note. “As a result of their methodology, these pure low-volatility portfolios magnify their interest rate sensitivity, and their performance becomes heavily dependent on the path of rates, as they have no other means of factor diversification.”
USMF holds 200 stocks, over 39% of which hail from the technology and healthcare sectors. None of the fund’s holdings exceed a weight of 1.47%.
Fidelity Low Volatility Factor ETF (FDLO)
Expense Ratio: 0.29%
Among low volatility ETFs, the Fidelity Low Volatility Factor ETF (NYSEARCA:FDLO) is one of the newer entrants, having recently turned two years old. This low volatility ETF targets the Fidelity U.S. Low Volatility Factor Index, “which is designed to reflect the performance of stocks of large and mid-capitalization U.S. companies with lower volatility than the broader market,” according to Fidelity.
FDLO holds 127 stocks and much like the aforementioned USMV, this fund takes a fresh approach to delivering reduced volatility. The Fidelity fund also allocates nearly 19.70% of its weight to technology stocks. Rare are the low volatility ETFs that feature Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) and Facebook (NASDAQ:FB) among their top 10 holdings, but FDLO is one of those funds.
FDLO is also lightly allocated to rate-sensitive sectors as the utilities and real estate sectors combine for just 6.19% of this low volatility ETF’s weight. However, FDLO’s large tech exposure has recently been problematic as this low volatility ETF’s one week decline is nearly 5%.
Invesco S&P 500 ex-Rate Sensitive Low Volatility ETF (XRLV)
Expense Ratio: 0.25%
The Invesco S&P 500 ex-Rate Sensitive Low Volatility ETF (NYSEARCA:XRLV) could be the low volatility ETF right for these times. XRLV’s underlying index, the Low Volatility Rate Response Index, features low volatility stocks with reduced interest rate risk.
“The Underlying Index is designed to include stocks exhibiting low volatility characteristics, after removing stocks that historically have performed poorly in rising interest rate environments,” according to Invesco.
Translation: this low volatility ETF features no exposure to real estate and utilities stocks. Rather, XRLV allocates nearly 42% of its combined weight to financial services and technology stocks.
Todd Shriber owns shares of SPHD.