Although broad stock markets have performed well to start the
year, a number of huge risks remain to further growth. European
woes, light job growth, and emerging market inflation are all
concerns that do not appear to be going away anytime soon, and have
rattled markets as of late.
However, there is currently a lack of quality alternatives to
the equity market, thanks to anemic bond yields which are forcing
many investors to reconsider their fixed income allocations.
Furthermore, if stocks begin to trend lower, a stronger dollar will
likely be a result, a factor that could crush commodity prices in
the near term (see more in the
Yet thanks to the issues outlined above, stocks could see
extreme levels of volatility, especially in the short term. In
fact, investors have already begun to see some of this price
movement as the S&P 500 has lost nearly fifty points so far in
the month of April.
Due to this shakiness, it may be time for risk adverse investors
to take a closer look at low volatility ETF options instead. These
securities focus on equities that have lower standard deviation
levels than many of their counterparts, making them interesting
picks for skittish investors who want to maintain lower risk equity
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Luckily for these investors, there are a number of choices in
the space, targeting various levels of the U.S. market and the
international space allowing anyone to focus in on low volatility
stocks in all of the most important areas of the economy. Below, we
profile six choices investors have in the low volatility space,
highlighting some of the key differences between each of these
U.S. Focused Low Volatility ETFs
Currently, investors have three choices to target low volatility
stocks in the U.S. market. There are two large cap choices and one
small cap ETF that is also an option:
PowerShares S&P 500 Low Volatility Portfolio
This fund tracks the S&P 500 Low Volatility Index which
consists of the 100 stocks in the S&P 500 with the lowest
realized volatility over the past twelve months. The ETF is
rebalanced and reconstituted quarterly, and pays out 3.2% to
investors in 30 Day SEC Yield terms.
This low volatility fund has a relatively concentrated holdings
list from a sector perspective as three segments account for 72% of
the total; consumer staples, utilities, and health care. This also
produces a fund that has a significant concentration in pure value
stocks (27%) while blend and value firms also make up a sizable
percentage as well. In terms of expenses, the fund charges
investors 25 basis points a year but it sees impressive volume of
nearly 890,000 shares a day.
Russell 2000 Low Volatility ETF (
This fund tracks the Russell-Axioma U.S. Small Cap Low
Volatility Index which looks to give investors access to more
stable companies in the small cap space. The ETF holds 176 holdings
in total and pays out a decent yield of around 2% in 30 Day SEC
Yield terms (see
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Top holdings in this ETF go to the utilities and real estate
sectors while the fund is extremely light in basic materials and
consumer discretionary firms. Value stocks comprise the biggest
chunk from a style perspective, at 47% of assets, while small cap
securities account for two-thirds of the total portfolio.
Unfortunately, volume is pretty weak in the fund-although observed
bid ask spreads are tight-while the expense ratio is 30 basis
points a year.
Russell 1000 Low Volatility ETF (
This low volatility ETF looks to track the Russell-Axioma U.S.
Large Cap Low Volatility Index which seeks to measure firms that
have lower levels of variability in their prices. This is based on
historic behavior and gives the product about 108 holdings in total
and a solid dividend yield just above 2% in 30 Day SEC terms.
The portfolio in this fund has a heavy focus on consumer staples
firms which make up roughly 23% of the portfolio while health care
and utilities round out the top three. Large caps constitute
roughly 77% of the fund while blend securities take the top spot
from a style perspective at 35% of assets. The average daily volume
in the fund is decent at 17,900 shares a day while the expense
ratio is pretty low at just 20 basis points a year (also read
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International Low Volatility ETFs
If foreign investing is more your style, there are also three
low volatility ETFs that target this space too. Currently,
investors have the option of looking at ex-U.S. developed, emerging
markets, and a broad international play as well.
Russell Developed ex-U.S. Low Volatility ETF (
This low volatility option tracks the Russell-Axioma Developed
ex-U.S. Large Cap Low Volatility Index in order to follow foreign
stocks that are more stable than their peers. In total, the fund
holds 313 holdings in its basket and pays an impressive dividend
around 3.0% to investors.
This ETF has a focus on consumer staples firms (25%), while
health care (18%), and financials (13%) also receive high
allocations. Exposure is pretty well split among the different
style types, while it definitely has a tilt towards large caps
(86%) from a market cap perspective.
For country exposure, the fund puts nearly one-fourth of the
assets in British firms, while Canada, Japan, and Switzerland also
receive double digit allocations. Volume is light-just 1,400 shares
a day-but expenses are in-line with other funds, coming in at 25
basis points a year.
PowerShares S&P Emerging Markets Low Volatility
For a play on developing nations, investors can look to EELV
which tracks the S&P BMI Emerging Markets Low Volatility Index.
This benchmark focuses in on the 200 least volatile stocks of the
S&P Emerging BMI Plus Large Mid Cap Index over the past 12
months and pays a solid dividend of 2.9% in 30 Day SEC yield terms
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Financials take the top spot in the emerging market ETF at just
over 23% of total assets, while consumer staples, and utilities
round out the top three. Blend securities also dominate (49%) the
fund from a style perspective while large caps account for
two-thirds of the assets from a capitalization perspective.
Interestingly, Malaysia and South Africa take the top two
country spots in the fund and are then trailed by Taiwan and Brazil
to complete the top four nation allocations. While the country
breakdown is impressive, the low volatility ETF is the most
expensive on the list coming in at 45 basis points a year while the
trading volume is light at just 4,000 shares a day.
PowerShares S&P International Developed Low
Volatility Portfolio (
If emerging markets aren't your cup of tea, PowerShares also
offers IDLV which tracks a similar index of developed market firms.
This benchmark holds 200 securities in total and also looks at
observed volatility levels over the past twelve month time period,
paying about 3.1% in dividends to investors.
This fund also focuses on consumer staples stocks, while also
giving high weights to industrials and financials as well.
Additionally, four more sectors receive at least 10% of the weight
suggesting a diversified portfolio (see
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Beyond sectors, the fund definitively has a tilt towards the
Asia-Pacific region, although Canadian firms do take the top
individual spot. In terms of costs, the fund is in-line with others
on this list at 25 basis points while the average daily volume
comes in light at just 3,000 shares.
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