One of the essential qualities to look for when investing in exchange-traded funds (ETFs) is high risk-adjusted returns. These low-risk ETFs are welcome additions to a portfolio because they factor in the risk taken for the fund to achieve its returns.
According to BlackRock, risk-adjusted return “is a calculation of the return (or potential return) on an investment such as a stock or corporate bond when compared to cash or equivalents.”
Investors are wise to consider the risk of an investment because it will help them understand whether or not they can safely reach their long-term goals. For example, if you have $100,000 saved and want to retire with a million-dollar nest egg in five years, you’ll likely have to ratchet up your risk significantly to achieve your goal. You may realize it’s unrealistic if you have an aversion to losses and volatility.
For risk-averse investors, consider these ETFs to buy now with high risk-adjusted returns over the long haul.
| AVUS | Avantis U.S. Equity ETF | $70.60 |
| EWMC | Invesco S&P MidCap 400 Equal Weight ETF | $85.32 |
| COWZ | Pacer US Cash Cows 100 ETF | $45.49 |
Avantis U.S. Equity ETF (AVUS)
The Avantis U.S. Equity ETF (NYSEARCA:AVUS) from American Century Investments gets a five-star rating from Morningstar. That tells you a little bit about its pedigree. Launched in September 2019, the all-cap ETF has grown to $4 billion in net assets.
AVUS is actively managed. However, you won’t pay through the nose for this service. The ETF charges a reasonable 0.15%, or $15 per $10,000 invested. There are a lot of passively managed ETFs that charge more than this.
How do they do it?
I encourage you to read the Principal Investment Strategies section of its summary prospectus to get an idea. Although it invests across all market capitalizations, the fund managers look for smaller, extremely profitable, value-oriented companies and shy away from less profitable companies with more expensive valuations.
The top three sectors by weighting are information technology (19%), financials (16%) and health care (12%). Its top three holdings by weighting are Apple (NASDAQ:AAPL) at 5.1%, Microsoft (NASDAQ:MSFT) at 4% and Amazon (NASDAQ:AMZN) at 1.4%.
The ETF has 2,410 holdings, with the top 1o accounting for nearly 18% of the portfolio. Its three-year average annual return is 17.6%.
Invesco S&P MidCap 400 Equal Weight ETF (EWMC)
The Invesco S&P MidCap 400 Equal Weight ETF (NYSEARCA:EWMC) tracks the performance of the S&P MidCap 400 Equal Weight Index. As the name implies, the index equal weights the index’s holdings, rebalancing quarterly.
I’m a big fan of mid-cap stocks and an even bigger fan of equal-weighted indexes and ETFs. Regardless of market capitalization, it allows the best-performing stocks to rise to the top.
EWMC has been around since December 2010, so it’s got a track record. Over the past 10 years, its annualized total return is 8.9%, putting it in the top quartile for performance over this period. Morningstar gives it five stars over three-, five- and 10-year periods.
The average holding in the fund has a market cap of $5.8 billion, a price-to-book (P/B) ratio of 2.2, and a price-to-earnings (P/E) ratio of 13.6. It’s right in the middle if you consider mid-cap stocks between $2 billion and $10 billion. But, of course, some go much larger in their market caps.
Despite doing its job, it’s not well-loved by investors, with just $181.7 million in net assets. That probably has something to do with it being a mid-cap equal-weight fund. Most investors shy away from this combination. However, its performance says you shouldn’t.
Pacer US Cash Cows 100 ETF (COWZ)
I love the Pacer US Cash Cows 100 ETF (BATS:COWZ) because it focuses on free cash flow. Specifically, it owns the top 100 companies based on free cash flow yield in the Russell 1000 Index.
Some investors define free cash flow yield as market cap divided by free cash flow. COWZ defines it as free cash flow divided by enterprise value (market cap plus debt less cash). It’s a better indication of value because it considers a company’s entire capital structure, not just the equity.
Not surprisingly, it, too, gets a five-star rating from Morningstar. Moreover, its past performance has been lights out, with just one losing year out of six since its inception in 2016.
Due to its focus on free cash flow, it’s also not surprising that energy is its top-weighted sector at 34.7%, followed by health care (18.9%) and materials (12.7%). The weighted average market cap of the 100 holdings is $62.9 billion, with a free cash flow yield of 12.05%. I consider anything over 8% to be in value territory.
The top 10 holdings account for 22% of its $12.7 billion net assets. If you’re looking for mid-cap value funds, COWZ should be at the top of your list of ETFs to buy now.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
