In today’s chaotic markets, using low-volatility exchange-traded funds (ETFs) to protect against stock market swings seems appealing. But there are about 80 of these funds to choose from, all with different methodologies and performance results. Keep the following in mind if you are considering them…
Over long periods, they tend to produce better risk-adjusted returns and less volatility than their traditional counterparts—but don’t count on them to stem your losses when the market plunges. In the 2020 bear market, many low-volatility ETFs lost as much as the broad market indexes, then lagged in the recovery. For predictable low volatility in the short run: Consider a defined-outcome or buffer ETF at
InnovatorETFs.com. Their hedging techniques cap your investment’s total losses (but also gains) over specific periods.
Look for ETFs that emphasize “minimum volatility” rather than “low volatility.” A low-volatility strategy screens for stocks with the lowest historical share-price fluctuations, but that can lead to heavy sector concentration and increase the portfolio’s overall volatility. Minimum-volatility funds, such as the broad-based iShares MSCI USA Minimum Volatility Factor ETF (USMV), add a layer of analysis that produces a smoother ride and better performance. It considers how the stocks correlate with one another in choppy markets.
Check under the hood. Whether they are right for you can depend on factors beyond low volatility. Legg Mason Low Volatility High Dividend ETF (LVHD) focuses on stocks with relatively high and sustainable dividend yields. Dividends can provide a buffer in rocky markets but also appeal to investors who need cash flow. The fund recently offered a 3.06% yield.