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Low-Volatility ETFs Prove They Work in Down Markets

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Among the thousands of ­exchange-traded funds available to investors, 33 focus on US stocks with one of the main attributes that many whipsawed investors want this year—low volatility. Over the past year, which included three periods of dramatically plunging markets, low-volatility ETFs proved their worth, averaging a return of –1.45% versus –4.4% for the S&P 500 Index. And low-volatility US stocks have outperformed the S&P 500 in 14 of the last 15 market downturns of at least 5%, according to Invesco.

Until recently, however, investors showed limited interest in these funds. Reason: Although low-volatility ETFs tend to outperform in downturns, they typically underperform when stocks are rising, which they have done for most of the bull market that began in 2009. 

My favorites now…

iShares Edge MSCI Minimum Volatility USA ETF (USMV) returned 1.4% for 2018 and an annualized 10.3% for the past five years versus –4.4% and 8.5% for the S&P 500. It holds about 210 large-cap and mid-cap stocks and has the most assets, $19.6 billion, of any low-volatility ETF. Top recent holdings included Newmont Mining, Visa Inc., Waste ­Management and Pfizer.

Invesco S&P SmallCap Low Volatility ETF (XSLV) returned –5.4% for 2018 and an annualized 9% for the past five years vs. –11% and 4.4% for the Russell 2000 small-cap index. The fund targets about 120 of the lowest-volatility US small-cap stocks over the previous 12 months, then gives the least volatile of these the largest weightings in its portfolio. Several of the top recent holdings are related to real estate. The holdings include Apollo Commercial Real Estate Finance, Granite Point Mortgage Trust and Northwest Bancshares.

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Source: Neena Mishra, CFA, ETF research director at Zacks Investment Research, Chicago. Zacks.com Date: March 1, 2019 Publication: Bottom Line Personal
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