investing

Low-Volatility ETFs Are Doing Their Job

These funds made a stomach-churning week easier to swallow

Many low-volatility ETFs are actually doing what they promised: delivering smaller losses in down markets.

The idea behind low-vol funds: Buy stocks with the lowest up-and-down moves. In theory, these stocks will suffer less in a down market.

Two important corollaries to the theory:

  1. They also will tend to rise less in up markets. Risk and return are joined at the hip: If you want lower volatility when the market is down, you’ll get it when the market is up, too.
  2. They still will fall in a down market. These are, after all, stock ETFs, and when the broad market falls, they will swoon along with it. Don’t buy one of these if you can’t stand to see your investment fall in value at all.

Because these funds are less volatile, you’re less likely to panic and sell in a downturn. And, because your losses will be smaller than a garden-variety ETF, you should return to profitability faster than an ETF that simply tracks the Standard & Poor’s 500-stock index.

Special mention should be made of these three low-vol ETFs:

  1. Fidelity Low Volatility Factor ETF (FDLO, $31.91) has fallen 4.93% since the S&P 500’s Sept. 20 high, while the index has tumbled 6.08%. The past 12 months the fund is up 11.59%, vs. 8.84% for the S&P 500.
  2. Franklin LibertyQ U.S. Equity ETF (FLQL, $29.86), down 5.80% since the market high and 9.93% for the past 12 months.
  3. Invesco S&P 500 Minimum Variance ETF (SPMV, $29.02), down 5.60% since the market high and 9.20% for the past 12 months.

Look carefully to see how the ETFs construct their portfolios. Invesco S&P 500 Low Volatility ETF (SPLV, $47.35), for example, simply invests in the 100 least volatile S&P 500 stocks and gives the least volatile stocks the highest weighting. The fund reconstitutes its holdings every quarter.

iShares Edge MSCI Min Vol USA ETF (USMV, $54.11) uses the MSCI USA Index, a somewhat more comprehensive index that includes mid-cap names. The fund picks the least volatile stocks within each industry sector, ensuring greater diversification.

Here’s the rundown on large-company blend low-volatility ETFs and how they have performed as of Oct. 11. Dividends and gains are reinvested. Data via Morningstar.

Getty Images

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
The 12 Best Tech Stocks to Buy for 2022
tech stocks

The 12 Best Tech Stocks to Buy for 2022

The best tech-sector picks for the year to come include plays on some of the most exciting emergent technologies, as well as several old-guard mega-ca…
January 3, 2022
How to Know When You Can Retire
retirement

How to Know When You Can Retire

You’ve scrimped and saved, but are you really ready to retire? Here are some helpful calculations that could help you decide whether you can actually …
January 5, 2022

Recommended

Is the Stock Market Closed on MLK Day?
Markets

Is the Stock Market Closed on MLK Day?

Both the stock markets and bond markets will have Monday off as the nation honors civil rights leader Martin Luther King Jr.
January 15, 2022
Stock Market Holidays in 2022
Markets

Stock Market Holidays in 2022

Is the stock market open today? Take a look at which days the NYSE, Nasdaq and bond markets take off in 2022.
January 14, 2022
5 Beginner Investing Tips for a Healthy Headspace
Becoming an Investor

5 Beginner Investing Tips for a Healthy Headspace

Lousy with numbers? Bad with money? That's OK. By adopting the right mentality, you can learn not only how to invest, but how to do so effectively.
December 30, 2021
The 2022 Stock-Market Outlook with Anne Smith and James K. Glassman
Markets

The 2022 Stock-Market Outlook with Anne Smith and James K. Glassman

Sure, measuring stock markets by calendar years is a bit artificial, but it’s still a good way to give your portfolio a checkup. We forecast what stoc…
December 28, 2021