It's been an extremely volatile year for the stock market. And this has sparked curiosity about a special brand of exchange-traded fund: low-volatility ETFs.
True, the stock market has shown signs of stabilizing recently as inflation readings suggested pricing pressures could be abating and worries about a deep recession eased. But it's worth remembering that uncertainty has been the name of the game in 2022, and it may be premature to sound the "all clear" and dive right back into aggressive growth stocks. While the market is doing pretty well over the last several weeks, there are stocks in once-favored sectors like technology that continue to lag behind.
If you're looking to get back into the market in a responsible way, or if you're simply looking to rejigger your portfolio to reflect the new reality on Wall Street, low-volatility ETFs are an interesting option. They allow investors access to the stock market, but with a lower risk profile than the typical index fund.
However, it's important to know that while these funds can often reduce overall volatility over longer time periods, they still can suffer mightily against sudden market shocks. So, make sure to check what's inside. The simple fact that they're meant to reduce volatility doesn't mean they're immune.
Here are 10 low-volatility ETFs that should give you more peace of mind in the long run. While all 10 funds should help investors reduce volatility, they do so across a number of strategies – not just low-vol, but also min-vol and other approaches. Take a look.
Data is as of Aug. 15. Dividend yields represent the trailing 12-month yield, which is a standard measure for equity funds.
iShares MSCI USA Min Vol Factor ETF
- Assets under management: $29.2 billion
- Dividend yield: 1.4%
- Expenses: 0.15%, or $15 annually for every $10,000 invested
The largest of the low-volatility ETFs as measured by assets, the iShares MSCI USA Min Vol Factor ETF (USMV (opens in new tab), $76.28) commands roughly $29 billion in assets at present and regularly sees daily trading volume north of 3 million shares. As risk-averse investors surely know, investments with liquidity can often be more volatile – so the established nature of this fund is already a big win.
As for the strategy of USMV itself, the approach is fairly simple: Its portfolio is made up of nearly 200 or so large and mid-sized U.S. corporations that illustrate lower volatility characteristics when compared with the market in general. It finds these low-volatility stocks by using a simple screening methodology tied primarily to the investing Greek known as "beta." Simply put, beta is a measure of correlation where a rating of exactly 1 means the stock moves in lockstep with its benchmark. Betas lower than 1 indicate the name moves less and those higher than 1 suggest it moves more. As stocks that make up the USMV portfolio all have relatively low beta rankings, they will theoretically move in a less extreme manner than the rest of Wall Street.
It's probably not too surprising that the stocks that tend to be more slow-and-steady in their movements are mostly in the healthcare or consumer staples sector. However, USMV does have a nice dose of technology stocks (18%) in its portfolio, though the names it includes are the sleepier names like legacy enterprise tech player Cisco Systems (CSCO (opens in new tab)) or chipmaker Texas Instruments (TXN (opens in new tab)) – both of which exhibit low-beta characteristics.
Keep in mind that high beta isn't always a bad thing. Consider that a high-beta stock will actually reap even bigger gains in a bull market, even if it may fall harder when times are tough. But if you're looking to avoid volatility in either direction, this simple approach could be for you.
Invesco S&P 500 Low Volatility ETF
- Assets under management: $11.8 billion
- Dividend yield: 1.9%
- Expenses: 0.25%
The Invesco S&P 500 Low Volatility ETF (SPLV (opens in new tab), $66.72) is another one of the established low-volatility ETFs featured here, commanding roughly $11 billion in assets. SPLV also provides another liquid option for those looking to play stocks that are less likely to jump around. The difference is that SPLV is a bit more selective on the size side of things, limiting its portfolio only to components in the S&P 500.
As a result, the holdings are similar but weighted more toward a focused list of 100 names, versus working in some of the more stable mid caps that are included in the prior iShares fund. To be clear, this doesn't mean one or two stocks dominate. The top three holdings in SPLV right now are Pepsico (PEP (opens in new tab)), McDonald's (MCD (opens in new tab)) and Coca-Cola (KO (opens in new tab)), and they collectively make up less than 4% of the entire portfolio. But it's worth noting that you're selecting from a smaller universe of stocks to build out this low-volatility ETF.
Diversification can be a double-edged sword. On one hand, there's no doubt that a well-rounded portfolio can smooth out some of the volatility that can be created when one or two holdings hit a snag. But on the other hand, longer lists of stocks are necessarily less selective.
Learn more about SPLV at the Invesco provider site. (opens in new tab)
Invesco S&P 500 High Dividend Low Volatility ETF
- Assets under management: $4.0 billion
- Dividend yield: 3.7%
- Expenses: 0.30%
The Invesco S&P 500 High Dividend Low Volatility ETF (SPHD (opens in new tab), $46.83) gets even more selective, prioritizing income potential from dividends when narrowing down the stocks included in its lineup.
SPHD has an even smaller list of stocks in its portfolio than the prior two low-volatility ETFS, composed of just 50 or so holdings. That obviously makes it a bit riskier, as it's hard to swim upstream if a handful of stocks move sharply in the wrong direction. However, the screening methodology to only focus on value-oriented stocks with historically low-volatility profiles may provide some peace of mind as these aren't the kind of companies that tend to lurch lower unexpectedly.
As key examples of the kinds of stocks that make up SPHD, top holdings at present include tobacco giant Altria Group (MO (opens in new tab)), midstream energy firm Kinder Morgan (KMI (opens in new tab)) and commercial real estate name Vornado Realty Trust (VNO (opens in new tab)).
And best of all, the dividend stocks collectively add up to a current yield of about 3.7% for this low-vol ETF. That's more than twice the yield of the S&P 500 Index at present.
Learn more about SPHD at the Invesco provider site. (opens in new tab)
iShares Edge MSCI Min Vol EAFE ETF
- Assets under management: $5.9 billion
- Dividend yield: 2.7%
- Expenses: 0.20%
The iShares Edge MSCI Min Vol EAFE ETF (EFAV (opens in new tab), $65.85) puts an international twist on its sister fund, the iShares MSCI USA Min Vol Factor ETF (USMV (opens in new tab)). Specifically, EFAV is a volatility ETF that primarily focuses on "EAFE" stocks instead of domestic ones – that is, companies headquartered in Europe, Australasia and the Far East. And many of the holdings are multinational names you may recognize.
This roughly $6-billion fund is made up of just over 230 stocks, with global consumer staples giant Nestle (NSRGY (opens in new tab)), Swiss pharma player Roche Holdings (RHHBY (opens in new tab)) and U.K. utility stock National Grid (NGG (opens in new tab)) among the top holdings at present.
The region-by-region breakdown is a bit heavy on Japan, which commands about 27% of the portfolio. The rest of the holdings are fairly spread out, with Switzerland taking the second spot at 15% of the portfolio and the U.K. at #3 with 12% or so. After that, no single nation represents more than about 7% of the portfolio assets.
These "developed" markets operate similar to the U.S. in many ways. And some who follow international corporate law could argue that many regulators in Japan or Europe are actually much more risk-averse than their American counterparts, making these large multinational stocks even safer than some of their U.S. peers. So if you're looking for one of the best low-volatility ETFs with a nod towards geographic diversification, you can invest in EFAV with confidence.
Learn more about EFAV at the iShares provider site. (opens in new tab)
iShares MSCI Emerging Markets Min Vol Factor ETF
- Assets under management: $6.3 billion
- Dividend yield: 2.0%
- Expenses: 0.25%*
Keeping with the theme of global investing with an eye toward low-volatility ETFs, the iShares MSCI Emerging Markets Min Vol Factor ETF (EEMV (opens in new tab), $56.71) is similar to the prior fund but instead focuses on only emerging market stocks.
Interestingly enough, it's actually slightly larger than its developed-markets sister, the iShares Edge MSCI Min Vol EAFE ETF (EFAV (opens in new tab)), commanding more than $6 billion in assets right now. That could be because many investors are still interested in tapping into the growth potential of emerging markets, but looking to do so in a responsible way that doesn't add too much risk or volatility to their portfolio. For these folks, EEMV is just what the doctor ordered.
The fund is composed of emerging market stocks in areas like China, India, Thailand and elsewhere. However, a methodology that prioritizes low volatility over growth means you'll avoid the unproven or fast-moving companies that make low-risk investors nervous about these regions.
By way of example, EEMV is made up of reliable and established picks like $30-billion Taiwan communications firm Chunghwa Telecom (CHT (opens in new tab)) and Saudi financial firm Al Rajhi Bank that commands roughly $100 billion in assets under management.
There's assuredly more risk in these regions than you'd find in the U.S. or even in Europe. However, EEMV may be a good mix of reduced volatility but long-term growth potential in emerging markets.
* Includes a 44-basis-point fee waiver.
Learn more about EEMV at the iShares provider site. (opens in new tab)
iShares MSCI Global Min Vol Factor ETF
- Assets under management: $4.7 billion
- Dividend yield: 2.1%
- Expenses: 0.20%
If you don't want to mix and match with multiple low-volatility ETFs based on various corners of the world, the iShares MSCI Global Min Vol Factor ETF (ACWV (opens in new tab), $99.77) has you covered with a comprehensive approach. This fund holds about 400 large stocks from both developed and emerging markets that exhibit low-volatility characteristics.
This approach provides global diversification, but also the ability to seek out the very best options to build a low-volatility portfolio. Right now, more than half (56%) of all assets are still in the U.S., followed by Japan (11%) and Switzerland (6%).
However, the main appeal is that the portfolio is built based on minimum volatility stocks that have historically declined less than the broader stock market during market downturns. If this is your goal, why limit yourself based on geography to achieve it?
Some of the biggest holdings in this roughly $5-billion ETF include U.S. healthcare icon Johnson & Johnson and telecom leader Verizon Communications (VZ (opens in new tab)). European pharma Roche Holdings and Swiss consumer brand Nestle are also included in the top 10.
If you're looking for a one-stop holding to invest in with a lower risk profile, then ACWV might be right for you.
Learn more about ACWV at the iShares provider site. (opens in new tab)
Invesco S&P MidCap Low Volatility ETF
- Assets under management: $1.2 billion
- Dividend yield: 1.6%
- Expenses: 0.25%
We've talked a lot about dividing up the universe of large-cap stocks by geography, but it's important to note that there are a ton of potential investments out there beyond the big names on Wall Street. The Invesco S&P MidCap Low Volatility ETF (XMLV (opens in new tab), $56.13) looks to offer exposure to the next rung down on the ladder, holding mid-cap stocks, or those with a market capitalization typically between $2 billion and $10 billion.
The methodology is fairly simple. First, XMLV takes the S&P MidCap 400 Index – that is, the next 400 stocks in line when you get past the larger names in the S&P 500 Index. Then, it screens that universe of holdings for the lowest realized volatility over the past 12 months, and picks the top 20% for a final portfolio of about 80 stocks.
There is naturally a bit more risk when you exclude the mega caps on Wall Street that have the deepest pockets. However, XMLV proves that there are plenty of modest-sized corporations that don't have to be a household name to have an incredibly strong foundation. Consider that the Invesco S&P MidCap Low Volatility ETF is down just about 4% for the year-to-date, compared with a decline of about 10% or so for the S&P 500 in the same period.
Top holdings in XMLV right now include Oklahoma utility stock OGE Energy (OGE (opens in new tab)), packaging company Silgan Holdings (SLGN (opens in new tab)) and medical property operator Physicians Realty Trust (DOC (opens in new tab)) as representative examples of the kind of stocks you'll gain exposure to with this low-vol ETF.
Learn more about XMLV at the iShares provider site. (opens in new tab)
Invesco S&P SmallCap Low Volatility ETF
- Assets under management: $782.9 million
- Dividend yield: 1.8%
- Expenses: 0.25%
Investors looking for low-volatility ETFs with a narrow focus could consider the Invesco S&P SmallCap Low Volatility ETF (XSLV (opens in new tab), $48.65). In case you didn't guess already, it's benchmarked to the S&P 600 Index – the next tranche of the U.S. stock market after you move past both the S&P 500 and the S&P 400.
If you're looking at low-volatility ETFs because you want to reduce your risk profile, it may sound crazy to jump right to the smallest stocks out there. The median market cap of this index is just $2 billion, after all, with a host of the smaller companies coming in at a few hundred million dollars in market value. But once again, it's important to note that the screening process by this Invesco ETF ensures the riskiest of these small-cap stocks are excluded and only those with historically low volatility profiles make the cut.
Consider that the two largest sectors represented in this ETF are real estate firms (22%) and financials (34%). As for individual stocks, XSLV's portfolio currently includes specialized real estate investment trusts (REITs) like Agree Realty (ADC (opens in new tab)), which operates stand-alone, net-leased properties to clients including Costco Wholesale (COST (opens in new tab)) and AutoZone (AZO (opens in new tab)). It also includes regional banks like the $4-billion Oklahoma-based BancFirst (BANF (opens in new tab)), which engages largely in regional consumer and business lending.
These niche firms may never grow to dominate Wall Street, but they do a brisk business with a certain group of customers – which gives them a lower volatility profile than some stocks that are much larger in size. These are the kind of picks you'll find in XSLV.
Learn more about XSLV at the iShares provider site. (opens in new tab)
JPMorgan Ultra-Short Income ETF
- Assets under management: $20.5 billion
- SEC yield: 2.5%*
- Expenses: 0.18%
We've mentioned several low-volatility ETFs built expressly out of companies that should experience fewer peaks and valleys than the rest of the stock market. However, another mammoth low-vol fund that has attracted risk-averse investors lately is the JPMorgan Ultra-Short Income ETF (JPST (opens in new tab), $50.14).
This $20-billion short-term corporate bond fund from JPMorgan isn't in stocks at all. In fact, almost half of the fund is in cash and cash equivalents at present and nearly all of the other half is stashed in rock-solid corporate bonds.
These bond holdings are lower risk because all of them mature in less than five years, and the vast majority of holdings have a duration of less than three years. On top of that, there are no "junk" bonds in here, but only loans to credit-worthy corporations that get the highest ratings such as Big Pharma mainstay AstraZeneca (AZN (opens in new tab)) or Japanese megabank Mizuho Financial Group (MFG (opens in new tab)). A heck of a lot will have to go wrong for corporations like these to default on their payments at all, let alone in the next year or two.
There is admittedly some interest-rate risk, as rising rates make older bonds with lower payouts less attractive – and thus, less valuable as a result. However, the short duration helps limit this risk. Plus, a significant amount of the ETF's cash has already moved over into higher-yielding bonds that have come to market lately as the older bonds roll off. The result is a fund that now yields 2.5%-- significantly better than your typical dividend stock these days, but with much less volatility.
* SEC yields reflect the interest earned after deducting fund expenses for the most recent 30-day period and are a standard measure for bond and preferred-stock funds.
Learn more about JPST at the JPMorgan Chase provider site. (opens in new tab)
PIMCO 1-5 Year US TIPS Index ETF
- Assets under management: $1.5 billion
- SEC yield: 14.1%
- Expenses: 0.20%
As long as we're talking about low-volatility ETFs in fixed income markets, it's hard not to also include the PIMCO 1-5 Year US TIPS Index ETF (STPZ (opens in new tab), $52.27). Like the prior fund, STPZ has a very short-term focus with bonds that mature in five years or less. However, instead of investing in corporate bonds, its focus is on TIPS.
Treasury Inflation-Protected Securities, or TIPS, are a special type of government bond issued by the U.S. Treasury. The principal value of TIPS is indexed to the rate of price inflation, as measured by the U.S. consumer price index (CPI). In other words, when American goods and services jump in price, the value of TIPS – and subsequently, this ETF that holds them -- also goes up.
This is a riskier approach than some of the low-volatility ETFs on this list because it is very dependent on inflationary pressures. So, if inflation is low, investors can find themselves sitting a dud.
However, while the most recent CPI report showed consumer prices moderated in July, they were still significantly elevated. It's still anyone's guess where inflation is headed, so this may be a way for investors to hedge their bets against inflationary pressures down the road.
Besides, the fund won't crash if inflation abates – it will just flatline. The 52-week range of STPZ is incredibly narrow, between roughly $52 and $56 per share, so if you want fewer bumps in the road, this slow and steady inflation-pegged ETF could be worth a look.
Jeff Reeves has covered finance and capital markets since 2008, contributing to outlets including CNBC, the Fox Business Network, the Wall Street Journal digital network, USA Today, US News & World Report and CNN Money.
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