Minimize Stress With Low Volatility ETFs

This article is the first in a series co-authored by David Fabian (fmdcapital.com) and Aaron Jackson (jacksonstocks.com). Each week we will be unlocking the secrets to some of the most talked-about exchange-traded funds in the market. The goal is to better understand what you own or elevate new ideas to the forefront of your watch list.

Many investors have been caught off guard this year with the sharp drop in stocks combined with a rush to safety in traditional defensive asset classes. This week we will be reviewing a trio of diversified ETFs designed to hold stocks with lower historical price fluctuations than traditional market-cap weighted benchmarks. These tools can be useful for more conservative investors that are seeking to maintain an allocation to stocks with the goal of mitigating downside risk.

Reviewing The Playing Field – David Fabian

The largest ETF in this space is the iShares MSCI USA Minimum Volatility ETF(USMV), which has over $8 billion in total assets. USMV contains exposure to 168 large and mid-cap stocks with top holdings in well-known names such as AT&T Inc (T) and McDonalds Inc (MCD). This smart beta fund carries a modest expense ratio of just 0.15% as well.

The USMV portfolio is constructed according to rigid constraints on individual stocks, sectors, and overall price sensitivity of each holding. While the structure of this ETF is that of a passive index, it’s holdings are regularly evaluated to ensure they are maintaining minimal price fluctuations relative to their peer group. In addition, the multi-sector approach allows for this fund to be suitable as a core holding in conservative portfolios and not just a short-term defensive hideout.

The PowerShares S&P 500 Low Volatility Portfolio (SPLV) is another well-regarded fund in this class with over $5 billion in total assets. SPLV takes a variant approach by taking the 100 lowest volatility stocks in the S&P 500 Index and equal weighting each underlying holding. The end result is a deep pool of quality large-cap stocks with high concentrations in financials, consumer staples, and industrial companies.