ETFs for investors worried about the market
In 2020, uncertainty has been the norm as the pandemic and related economic challenges have roiled stock markets. From the big declines for U.S. stocks in the spring to the uncertainty around a looming Brexit in Europe to more recent questions about tech stock valuations, it’s hard to find a safe place to stash your money that lasts more than a few months. The following nine low-volatility exchange-traded funds aim to provide a much lower risk profile than the typical fund, however, with strategies designed to limit big moves. You may not double your money overnight, but these ETFs are smart choices for investors who are worried as much about the downside as the upside these days.
iShares MSCI USA Min Vol Factor ETF (ticker: USMV)
This iShares ETF is the largest low-volatility offering on Wall Street, with almost $34 billion in assets under management and daily trading volume of about 4 million shares. The strategy of USMV is simple but attractive: It zeros in on the top 200 or so U.S.-based corporations that illustrate less volatility when compared with their peers and the market as a whole. The result is a focus on staples stocks such as telecom giant Verizon Communications (VZ) and utilities such as NextEra Energy (NEE) that will perform steadily no matter what’s happening in the economy. USMV also comes with a low annual expense ratio of 0.15%, or $15 for every $10,000 invested.
Invesco S&P 500 Low Volatility ETF (SPLV)
A slightly more focused fund, SPLV picks the 100 stocks in the S&P 500 that exhibit the lowest volatility — that is, the investments that have experienced narrower price fluctuations over time. Perhaps unsurprisingly, less than 10% of the entire portfolio is invested in the three sectors of consumer discretionary stocks, real estate and materials companies. While there are occasionally high-flying names in these sectors, there are also picks that have a history of big losses. Instead, you’ll find companies that are a bit more boring but certainly more reliable, such as tried-and-true cleaning products company Clorox Co. (CLX), which has weathered the pandemic like a champ and hit an all-time high over the summer.
Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)
Taking things one step further, Invesco also offers a low-volatility fund that prioritizes income potential from dividends. SPHD has a much smaller list of just 50 or so picks, which makes it less diversified on the whole than some larger ETFs but also allows the fund to concentrate its assets on companies that offer bigger paydays. These include stocks such as document storage and cloud security firm Iron Mountain (IRM), which yields more than 8% and makes up about 3% of this ETF’s portfolio at present. Collectively, all of SPHD’s holdings add up to a 12-month distribution rate of about 5.4%. It comes with an expense ratio of 0.3%.
iShares MSCI EAFE Min Vol Factor ETF (EFAV)
A sister fund to the first fund mentioned, USMV, is the iShares MSCI EAFE Min Vol Factor ETF. This low-volatility ETF focuses on EAFE companies instead of domestic ones — that is, Europe, Australasia and the Far East. This roughly $11 billion fund is composed of a slightly larger list of about 270 stocks, but the risk profile is very similar to its sister fund focused on the U.S. Current top holdings include consumer staples giant Nestle SA (NESN) and telecommunications company Swisscom AG (SCMN). One note for those looking for true diversification, however: Japan represents roughly 30% of the portfolio, so there is a bit of geographical bias here to keep in mind.
iShares MSCI Emerging Markets Min Vol Factor ETF (EEMV)
Keeping with the theme, this iShares fund is another large low-risk ETF, with more than $4 billion in total assets and a regional focus on low-volatility investments. This time, however, the fund is composed of emerging-market stocks in areas like China, India and Thailand. Thanks to a similar screening methodology that prioritizes low volatility, you’re not gaining exposure to small and fast-moving companies that many investors picture when they think about emerging markets. Instead, investors get more reliable picks, such as $400 billion chipmaker Taiwan Semiconductor Manufacturing (TSM), in the roughly 320 holdings of this low-volatility ETF.
iShares MSCI Global Min Vol Factor ETF (ACWV)
Don’t want to pick just one region? Well, you don’t have to with this low-volatility ETF that holds nearly 400 stocks that you’d find on each of these other regional funds. True, about half of all assets are still in the U.S. since this is the largest stock market in the world, but its next-largest allocations include about 11% in Japan and another 6% or so across various European nations. That makes for a generally diverse list of stocks across the globe. The fund is also pretty diversified across sectors, with tech stocks representing the biggest slice at 15% or so but every other sector commanding around 13% or less of the portfolio.
Invesco S&P MidCap Low Volatility ETF (XMLV)
Slicing up the stock market by size instead of by geography, Invesco offers a mid-cap fund that is built with a low-volatility strategy in mind. There is naturally a bit more risk when you exclude the mega-caps on Wall Street that have the deepest pockets, but 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. XMLV is made up of about 80 stocks like bakery operator Flowers Foods (FLO) — which owns familiar brands such as Tastykake treats and Wonder Bread — and chemicals and lubricants firm NewMarket Corp. (NEU). XMLV also has a relatively low expense ratio of 0.25%.
Invesco S&P SmallCap Low Volatility ETF (XSLV)
For investors who want to go even smaller with a focus on the smallest slice of the U.S. stock market, XSLV is a natural option for a low-volatility ETF. It may sound inherently risky to exclude the largest and even middle-market corporations, but once again, the screening process deployed by Invesco helps traders zero in on lower-risk options — even if they are modest in size. For instance, the largest sector represented in this ETF is industrials thanks to specialized firms like solvents manufacturer WD-40 Co. (WDFC) and security and inspection components firm OSI Systems (OSIS). These niche companies may never grow to dominate Wall Street, but they do brisk business with a certain group of customers — which gives them a lower volatility profile than some stocks that are much larger in size.
JPMorgan Ultra-Short Income ETF (JPST)
Another mammoth fund attracting low-risk investors is this $14 billion short-term corporate bond fund from JPMorgan Chase & Co. (JPM). The vast majority of holdings have a duration of less than five years, and more than a third of the fund’s positions mature in less than three years. The fund invests mainly in “investment-grade” bonds, too, with no assets tied to firms with shaky credit ratings. There is a natural trade-off with risk and duration, since it’s hard to predict where any corporation will be in 20 or 30 years — but when you focus on only the next few years and only on high-quality borrowers, you have a pretty sure thing. Another trade-off is that this low-risk debt tends to not yield all that much, however, with the 12-month yield for JPST at just 1.8%.
Nine ETFs for low-risk Investors:
— iShares MSCI USA Min Vol Factor ETF (USMV)
— Invesco S&P 500 Low Volatility ETF (SPLV)
— Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)
— iShares MSCI EAFE Min Vol Factor ETF (EFAV)
— iShares MSCI Emerging Markets Min Vol Factor ETF (EEMV)
— iShares MSCI Global Min Vol Factor ETF (ACWV)
— Invesco S&P MidCap Low Volatility ETF (XMLV)
— Invesco S&P SmallCap Low Volatility ETF (XSLV)
— JPMorgan Ultra-Short Income ETF (JPST)
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Update 09/16/20: This slideshow was published on a previous date and has been updated with new information.