Low volatility ETFs had a few days in the sun last year, particularly in the fourth quarter when the S&P 500 tumbled nearly 15%.
The S&P 500 finished 2018 with annualized volatility of 17%, the highest reading over the past six years, according to ETF Replay data. That market turbulence prompted investors to turn to low volatility ETFs for stability and those funds obliged. The two largest U.S.-listed low volatility ETFs outperformed the S&P 500 while sporting average annualized volatility of about 13%.
And that’s exactly what low volatility ETFs are supposed to do: be less volatile and perform less poorly than standard equity funds when the broader market declines. Those are the expectations investors should have from low volatility ETFs. Investors expecting low volatility to offer significant out-performance when stocks are surging are likely to be disappointed.
The thing about volatility is that it frequently catches investors off guard. In other words, it is better to be prepared than reactive when volatility spikes. Investors can do just that with these low volatility ETFs.
iShares Edge MSCI Min Vol Emerging Markets ETF (EEMV)
Expense ratio: 0.25% per year, or $25 on a $10,000 investment.
With the MSCI Emerging Markets Index up nearly 8% year-to-date, some investors will likely be tempted — rightfully so — to nibble at developing economies. Investors that want to do so in conservative fashion can do so with the iShares Edge MSCI Min Vol Emerging Markets ETF (BATS:EEMV), one of a few emerging markets low volatility ETFs.
EEMV is up 5.10% year-to-date, reminding investors that international low volatility ETFs, like their domestic equivalents, can lag when the underlying market is rising. Still, EEMV has plenty of benefits for investors.
“True to its design, EEMV has historically provided investors with downside risk mitigation. In 2018, EEMV declined 58% less than that of broad EM as measured by the MSCI Emerging Markets Index,” according to BlackRock. “If we extend the analysis to a longer period of time, similar performance behaviors hold. Since its first full month of live performance in November of 2011, EEMV has exhibited a downside capture of only 78%, reduced volatility by over 23%, and dampened the maximum drawdown by 22%.”
EEMV holds over 300 stocks. China and Taiwan combine for almost 40% of the fund’s geographic weight.
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Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)
Expense ratio: 0.30% per year, or $30 on a $10,000 investment.
The Invesco S&P 500 High Dividend Low Volatility ETF (NYSEARCA:SPHD) is one of the best low volatility ETFs for investors looking for the benefits of reduced volatility and higher income. SPHD tracks an index comprised of the 50 S&P 500 stocks with the lowest trailing 12-month volatility and the highest dividend yields.
The required combination of low volatility and high dividend yields can lead to some concentration risk at the sector level. After all, not all of the 11 sectors in the S&P 500 are considered light on volatility or high-yield plays. Not surprisingly, SPHD allocates about 49% of its weight to real estate and utilities names. Those sectors usually fit the bill as high-yield and less volatile than other sectors.
For income investors, SPHD definitely makes sense as this low volatility ETF has a 12-month distribution rate of 4.06% — almost double the S&P 500’s dividend yield. SPHD has a five-star Morningstar rating.
Fidelity Low Volatility Factor ETF (FDLO)
Expense ratio: 0.29% per year, or $29 on a $10,000 investment.
Fidelity has an expanding lineup of cost-effective ETFs, including some factor-based strategies. The Fidelity Low Volatility Factor ETF (NYSEARCA:FDLO) is one of those funds.
This low volatility ETF tracks 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.
Last year, FDLO beat the S&P 500 and was less volatile than the benchmark, but the Fidelity fund lagged the two largest low volatility ETFs. This year, FDLO is beating the biggest low volatility ETF. At the sector level, FDLO is unique relative to other low volatility ETFs. Technology is the largest sector weight in FDLO at 19.62% and FDLO allocates less than 7% of its combined weight to the real estate and utilities sectors.
Todd Shriber owns shares of SPHD.
