In November 2020, The Globe and Mail discussed low-volatility exchange-traded funds (ETFs). The author argued that it was the perfect time to buy these funds that focus on safe stocks with lower volatility because they were lagging the markets.
The Executive Director of the Canadian ETF Association, Pat Dunwoody, chimed in on the conversation.
“They are really specifically suited for buy and hold strategies,” Ms. Dunwoody told the paper. “I don’t know whether the kind of people that would be investing in low-vol products worry as much about ‘oh, I didn’t make as much as if I had invested in X product,’ they are more likely to say, ‘I was able to sleep every night because I knew my investments were very secure.’”
Although the article was focused on the Canadian ETF industry, the same theory holds here in the U.S. People who invest in these ETFs aren’t looking for a home run. They want consistent singles and doubles that add up over time.
According to ETF Database, there are 11 low-volatility ETFs with assets above $1 billion. Here are 10 safe stocks from the top five equity ETFs by assets:
- Microsoft (NASDAQ:MSFT)
- Johnson & Johnson (NYSE:JNJ)
- Unilever (NYSE:UL)
- National Grid (NYSE:NGG)
- Verizon Communications (NYSE:VZ)
- Expeditors International of Washington (NASDAQ:EXPD)
- McDonald’s (NYSE:MCD)
- Visa (NYSE:V)
- Alibaba (NYSE:BABA)
- Taiwan Semiconductor (NYSE:TSM)
Safe Stocks to Buy: Microsoft (MSFT)
Microsoft is the first of two stocks from the iShares MSCI USA Min Vol Factor ETF (BATS:USMV), an ETF with $29 billion in net assets and a management fee of 0.15%. It tracks the MSCI USA Minimum Volatility Index performance, a group of stocks that have lower volatility relative to the U.S. mid-cap and large-cap equity markets.
Microsoft is the largest holding in USMV with a weighting of 1.7%. It’s part of the technology sector, which accounts for 23.77% of the ETF’s total net assets. Technology stocks have the largest weighting by sector, followed by healthcare (18.74%) and consumer staples (10.54%).
As for Microsoft itself, the fact that it’s generated $56 billion over the past 12 months speaks for itself. The company recently announced that it would pay $19.7 billion to buy Nuance Communications (NASDAQ:NUAN), best known for its Dragon dictation software. The company’s focus on voice transcription in clinical settings means its artificial intelligence (AI) solutions will benefit Microsoft as it goes after the healthcare provider space.
Johnson & Johnson (JNJ)
Johnson & Johnson is another stock from USMV. It has a weighting of 1.53%, making it the fourth-largest holding in the ETF. It’s generated $20.2 billion over the past 12 months.
The big news from JNJ is that its vaccine is on hold while the Centers for Disease Control and Prevention (CDC) decides whether potential blood clots caused by its shot are serious enough to keep it on the sidelines. As I write this, the CDC is meeting to discuss what should be done.
The company announced it sold $100 million worth of its vaccine in the latest quarter. That was just 2% of its $22 billion in sales for the quarter. By comparison, Moderna (NASDAQ:MRNA) is projected to generate $18 billion in annual revenue from its vaccine.
Fortunately for shareholders, the company’s sales and earnings in the first quarter were better than analyst expectations. Long term, you can’t go wrong with JNJ stock.
Safe Stocks to Buy: Unilever (UL)
Unilever is the first of two stocks from the iShares MSCI MSCI EAFE Min Vol Factor ETF (BATS:EFAV), an ETF with $9.2 billion in net assets and a management fee of 0.32%. It tracks the MSCI EAFE Minimum Volatility Index performance, a group of stocks that have lower volatility relative to the MSCI EAFE Index.
Unilever is the 15th-largest holding in EFAV with a weighting of 1.o3%. It’s part of the consumer staples sector, which accounts for 15.69% of the ETF’s total net assets. Healthcare stocks have the largest weighting by sector (17.12%), followed by consumer staples and industrials (14.25%).
In March, I recommended Unilever and six other environmental, social, governance (ESG) investments to own.
My thought about Unilever is that former CEO Paul Polman put the company in a better position for the long haul by focusing on all the company’s stakeholders, and not just shareholders.
While performance has been spotty over the years, it’s hard to critique the collection of brands built over the years. Like Procter & Gamble (NYSE:PG), I use a bunch of its products. If you’re in the same boat, owning UL stock is like paying yourself first.
National Grid (NGG)
Another holding from EFAV is U.K.-based utility company National Grid. It is slightly behind Unilever with a weighting of 1%.
In January 2019, I called National Grid one of the 10 best utility stocks to buy for 2019. It’s had a bit of a bumpy ride in the 27 months since. Up 21% — and adding in two years’ worth of dividends — it appears to have the legs to keep moving higher.
While it’s definitely not a stock that will make you rich, it likely won’t put you in the poorhouse either.
As I noted in 2019, National Grid generates revenue from both the U.K. and the U.S., not to mention its venture capital division, National Grid Partners. On April 19, the VC announced that it had raised $150 million to invest in startups using technology to benefit the energy industry.
National Grid originally raised $250 million 30 months ago to invest in energy disruptors. To date, it’s invested more than $227 million of the capital in 29 startups. Two of its investments have already exited, delivering a 150% internal rate of return.
This could be the sleeper of my 10 stock recommendations.
Safe Stocks to Buy: Verizon Communications (VZ)
Verizon is the first of two stocks I’ve chosen from the Invesco S&P 500 Low Volatility ETF (NYSEARCA:SPLV), an ETF with $8 billion in net assets and a management fee of 0.25%. It tracks the performance of the S&P 500 Low Volatility Index, a group of 100 stocks from the S&P 500 with the lowest volatility over the past 12 months.
Verizon is the largest holding in SPLV, with a weighting of 1.42%. This means it is the least volatile of the 100 stocks in the portfolio. VZ is part of the communication services sector, the sixth-largest sector weighting in the ETF. It accounts for 7.06% of the ETF’s total net assets. Consumer staples stocks have the largest weighting by sector (25.09%), followed by healthcare (21.74%).
On April 15, Verizon announced that it would launch 5G internet for businesses in 21 U.S. cities. This expands on its earlier efforts in Chicago, Houston and Los Angeles.
In the first quarter of 2021, Verizon’s revenue increased by 4% to $32.9 billion, with all three of its operating segments delivering year-over-year sales growth. On the bottom line, it had adjusted earnings per share of $1.31, 4% higher than in Q1 2020.
Expeditors International of Washington (EXPD)
The second of my two stock picks from SPLV, EXPD, is the third-largest holding of the ETF with a weighting of 1.21%. Expeditors is an international freight forwarding company that gets its customers’ freight where it needs to go anywhere in the world by utilizing a global network of 331 locations in 109 countries.
In February, the company reported Q4 2020 results. On the top line, sales increased 55% to $3.2 billion while operating earnings increased by 56% to $282 million.
“We moved more freight in the fourth quarter of 2020 than in any other quarter in our history,” CEO Jeffrey Musser stated in the press release. Expeditors generate 47% of its revenue from air freight services, 30% from customs brokerage and 23% from ocean freight and ocean services.
The company does a decent job converting income into free cash flow. In 2020, it had $608 million in FCF, converting 87% of its net income.
As the global economy picks up, EXPD stock should continue to move higher.
Safe Stocks to Buy: McDonald’s (MCD)
Despite all the negative press over the past year for the Golden Arches, McDonald’s stock is still up almost 10% year-to-date. MCD is the first of two stocks I’ve chosen from the iShares MSCI Global Min Vol Factor ETF (BATS:ACWV) with a 1.09% weighting, making it the seventh-largest holding out of 378 stocks.
This particular ETF tracks the performance of the MSCI All Country World Minimum Volatility Index. The index invests in equities from both developed and emerging markets. Unlike some global funds, it includes the U.S., which accounts for 53% of the ETF’s $5.2 billion in total net assets.
The negative press I speak of has to do with the corporate culture former CEO Steve Easterbrook created at the company before being fired for sexually explicit texts to an employee. Easterbrook’s replacement has spent the past 18 months cleaning up the mess while trying to get its franchisees on the same page as the head office.
For the most part, it’s worked. The company believes its 2021 results will be better than its results in 2019 before the pandemic. Its Q4 2020, same-store sales in the U.S. increased by 5.5%, the second consecutive quarter in positive territory.
That’s excellent news if you’re a shareholder.
The second of the two stocks from ACWV is one of the world’s biggest non-bank financial services companies. Financial services stocks account for 11.38% of the ETF’s portfolio, with Visa being the eighth-largest holding at 1.07%.
At the end of March, the payment processor said it would begin allowing U.S. Dollar Coin (CCC:USDC-USD) when settling transactions through its payment network. The cryptocurrency is pegged to the U.S. dollar, so it’s always worth $1. It plans to accept more cryptocurrencies in the future.
“We see increasing demand from consumers across the world to be able to access, hold and use digital currencies and we’re seeing demand from our clients to be able to build products that provide that access for consumers,” Cuy Sheffield, head of crypto at Visa, said.
Visa’s latest step eliminates the need for the digital coin to be converted into U.S. dollars to settle a transaction.
You can be sure that Visa will be on the leading edge by the time cryptocurrencies become the norm for settling transactions in the future. It didn’t become a $500-billion company by ignoring market trends.
Safe Stocks to Buy: Alibaba (BABA)
Alibaba is the first of my two stock picks from the iShares MSCI Emerging Markets Min Vol Factor ETF (BATS:EEMV). The ETF tracks the performance of the MSCI Emerging Markets Minimum Volatility Index. The index comprises large-cap and mid-cap stocks with lower volatility than other stocks from the MSCI Emerging Markets Index.
As the name suggests, EEMV invests in stocks from China (33.16% weighting), Taiwan (17.78%), India (10.96%) and other emerging markets. Alibaba represents the consumer discretionary sector (13.73% weighting) with a weighting of 1.29%. It is the ETF’s ninth-largest holding and the largest of 36 consumer discretionary stocks.
As for the company itself, it recently paid a record fine of $2.8 billion to the State Administration for Market Regulation, the Chinese government’s regulatory body for overseeing antitrust behavior. Representing just 4% of its annual revenue, the fine is a slap on the wrist for the e-commerce company.
As InvestorPlace’s Muslim Farooque recently stated, thanks in part to the losses BABA stock endured after the news surfaced about the fine, Alibaba’s stock is now undervalued by 34% according to analyst estimates.
Alibaba continues to generate a huge amount of free cash flow — 164.4 billion Chinese yuan ($24.7 billion) in the trailing 12 months — making it an excellent long-term hold for 2021 and beyond.
Taiwan Semiconductor (TSM)
The last of the stocks on this list, TSM, is the largest holding of EEMV with a weighting of 1.76%. It is also the largest of 37 tech stocks in the portfolio, which account for 15.86% of the fund. Financials account for the largest portion of EEMV with a weighting of 20.88%.
InvestorPlace’s Louis Navellier recently argued that Taiwan Semiconductor is the perfect way to play the global chip shortage. That’s because the chip shortage could be worsened by companies accelerating their chip orders to protect against further deterioration of the trading relationship between the U.S. and China.
“Taiwan Semiconductor could benefit from this if Chinese tech companies accelerate their purchases of microchips due to concerns over possible further sanctions from the U.S. government,” Navellier wrote on April 20.
The company is investing $100 billion over the next three years to meet the needs of a world thirsting for 5G and high-performance computing. That makes TSM a very attractive near-term to mid-term play.
I’m not much of a semiconductor expert, but even I can see how Navellier’s arguments make sense.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.