With the S&P 500 down more than 20% year-to-date, investors’ search for equity strategies that are working is more about “less bad” than what’s actually generating positive returns.
The reason for that is simple: In a bear market, which is defined by a decline of 20% or more, not much is working. Hence, the bear market. While silver linings are few and far between this year, one that is clear is that investors don’t have to do anything exotic or fancy to locate less bad. Value and dividend stocks and exchange-traded funds prove as much.
Add low volatility ETFs to the list. These products have long been popular with advisors and investors alike and, in some respects, 2022 is the ideal time to consider these funds. Particularly for investors that want to position for a potential rebound in stock while avoiding riskier segments.
The key is remembering that “low vol” ETFs are designed to perform less poorly when markets swoon – not capture all of a bull market’s upside. With that in mind, some of the following low vol ETFs may be worth examining today.
Invesco S&P 500 Low Volatility ETF (SPLV)
The Invesco S&P 500 Low Volatility ETF (SPLV) – one of the forefathers of the low vol ETF movement – is doing its job this year. It’s 9.3% year-to-date loss is vastly superior to the 20.3% shed by the S&P 500 and the Invesco ETF is reducing turbulence as advertised.
SPLV’s annualized volatility to this point in the year is 16.2%, or 770 basis points lower than that of the S&P 500. This low volatility ETF tracks the S&P 500 Low Volatility Index, which is a collection of the stocks from the parent index with the lowest trailing 12-month volatility.
“The latest rebalance for the S&P 500 Low Volatility Index shifted an additional 3% weight to the Health Care sector,” according to S&P Dow Jones Indices. “Consumer Discretionary, despite notching the highest volatility increase, also added weight to the portfolio, pointing to pockets of relative stability within the sector.”
Still, SPLV is largely dominated by, not surprisingly, the utilities and consumer staples sectors.
Franklin U.S. Low Volatility High Dividend Index ETF (LVHD)
Consider the Franklin U.S. Low Volatility High Dividend Index ETF (LVHD), a “best of both worlds” play among low vol ETFs, because as its name implies, it combines volatility reduction with high dividend stocks. Those strategies are working this year. Sort of.
In this case, “sort of” means a year-to-date loss of just 7.4% and annualized volatility that not only trounces the S&P 500, but is also slightly lower than SPHD, too.
“Dividend-income funds may look appealing to those seeking a stable source of income,” noted Morningstar analyst Daniel Sotiroff. “Done well, they can deliver on this objective. But there is some nuance to determining what constitutes a good dividend-income index strategy. Changes to dividend payments don’t occur in a vacuum. Stocks with rising dividends are often backed by financially stable companies with strong sales and profit growth that support those higher cash distributions. These profitable firms often trade at higher prices relative to their fundamentals, including dividends, and rarely if ever land in the higher-yielding segment of the market.”
Fortunately, LVHD is home to plenty of quality companies with desirable track records of boosting payouts.
Invesco S&P MidCap Low Volatility ETF (XMLV)
As is par for the course, mid-cap stocks are going overlooked this year and while the performances in this group aren’t anything to write home about, the S&P MidCap 400 Index is outpacing the S&P 500 by 160 basis points year-to-date.
The Invesco S&P MidCap Low Volatility ETF (XMLV) is getting in on the act, faltering just 12.4% year-to-date with annualized volatility that’s 820 basis points below that of the aforementioned mid-cap benchmark.
The $1.11 billion XMLV, which tracks the S&P MidCap 400 Low Volatility Index, holds 81 stocks with an average market value of $5.98 billion.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Todd Shriber
Todd Shriber got his start in financial markets as a reporter with Bloomberg News. Later, he became a trader at a Southern California-based long/short hedge fund where he specialized in trading sector and international ETFs leading up to and during the financial crisis. He would later become the web editor at ETF Trends. Currently, he analyzes, researches and writes on ETFs for a variety of Web-based publications and financial services firms.Shriber has been quoted in the Barron's, CNBC.com and the Wall Street Journal. His work has been published on Web sites such as Benzinga, ETF Daily News, ETF Trends, MarketWatch, Fox Business and Nasdaq.com.
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