If you thought that you could handle a volatile stock market, this year’s market crash put that belief to the test. Many of you now may want to transition to a more sedate investment portfolio, either quickly or over the long term.
To help you, Bottom Line Personal asked three investment pros how to choose lower-volatility individual stocks…mutual funds…and exchange-traded funds (ETFs)…
The companies whose stocks hold up best in rocky markets have a history of steady annual earnings and strong cash flow regardless of the economic environment. Look for these additional characteristics…
The company produces and/or sells necessities that people don’t cut back on in hard or uncertain times, such as basic food items, beverages, cleaning supplies and health products.
It has familiar brands that dominate their niches.
It has a fortresslike balance sheet that enables the company to gain market share and acquire faltering competitors in tough times.
Historically, the following six stocks have been 50% to 75% less volatile than the S&P 500. And although they tend to lag in rising markets, their overall performance over the past decade has been nearly as good or better than that of the index. These six all have held up particularly well as the stock market plummeted starting in February.
The Clorox Company (CLX). The 107-year-old company sells well-known brands including its namesake bleach and disinfecting wipes, Liquid-Plumr, Pine-Sol, Glad trash bags and Brita water filters. It has seen higher cleaning-product sales because of the coronavirus pandemic. But more importantly, it’s one of Wall Street’s most financially consistent companies and has increased its dividend every year since 1977. Recent yield: 2.45%. 10-year performance: 12.2%. 2020 performance: 13.5%.*
Core-Mark Holdings (CORE) operates one of the largest wholesale distribution networks for convenience stores in North America, providing branded and private-label snacks, gum, ice cream and novelty purchases such as sunglasses and cell-phone accessories to more than 43,000 locations. 10-year performance: 15.1%. 2020: 5.5%.
Digital Realty Trust (DLR) is a real estate investment trust (REIT) that owns more than 200 data centers, mostly in large US metropolitan hubs. Its giant warehouses are filled with computer servers and data-communications equipment that are rented out to companies such as Amazon, Google and Microsoft, which store digital data there. Demand for data storage will continue to surge, allowing the company to keep raising rents and expanding. 10-year performance: 12.3%. 2020: 17%.
Domino’s Pizza (DPZ). Not only do pizza sales hold up well in economic slowdowns, but with millions of people staying home amid the coronavirus pandemic, pizza deliveries surged and the largest US pizza chain was adding 10,000 employees. It has about 17,000 stores in more than 90 countries. 10-year performance: 37.9%. 2020: 10.6%.
The Kroger Co. (KR) is the largest US supermarket chain, with more than 2,700 stores in 35 states. More than 80% of them have pharmacies and half have gas stations—which boost recurring customer traffic. Kroger was adding 10,000 workers as sales surged amid the coronavirus outbreak. 10-year performance: 12.1%. 2020: 4.5%.
Walmart (WMT). Low-cost retailers not only maintain their earnings in uncertain economic times, they also tend to thrive as consumers “trade down” from luxury goods to more affordable merchandise. In the 2007–2009 recession, when the S&P 500 fell 54%, Walmart, America’s largest retailer, with 11,300 stores in 27 countries, actually gained 10%. The company had to play catch-up in e-commerce but now is the third-biggest online retailer behind Amazon and eBay. Walmart was adding 150,000 employees starting in March. 10-year performance: 9%. 2020: –3.9%
Charles Sizemore, CFA, is principal of investment advisory firm Sizemore Capital Management, Dallas, and coauthor of Boom or Bust: Understanding and Profiting from a Changing Consumer Economy. SizemoreCapital.com
Mutual Funds and ETFs
Actively managed funds have a variety of ways to lower volatility in rocky times including temporarily holding large amounts of cash…investing in deeply undervalued stocks that have already fallen in value…and owning bonds and preferred stocks. The three actively managed funds below offer excellent downside protection and solid long-term returns.
Low-volatility ETFs take a different approach. They stay fully invested at all times as they passively track a portfolio of domestic or foreign stocks that have a history of low volatility. In down markets, the ETFs below typically fall about 20% less than comparable traditional market indexes.
My three favorite actively managed funds with low volatility…
Akre Focus (AKREX). Manager Chuck Akre invests only in companies that he calls “compounding machines,” which means that they are highly profitable…generate enormous cash flow…and dominate their industries. If he can’t find attractively priced investments, he holds large cash stakes. Even though the fund is 10% less volatile than the S&P 500, it has outperformed the index over the past decade and ranks in the top 1% of its category. 10-year performance: 15.2%. 2020: –11.2%.
Bruce Fund (BRUFX). This tiny fund run by a father-son team in Cincinnati has been a hidden gem. It typically holds 75% in large- and mid-cap bargain-priced stocks and cushions volatility with a mix of US Treasuries and “zero coupon” government bonds. Zero coupons don’t pay interest but often can be bought at steep discounts to their value at maturity. They do particularly well when the Federal Reserve is cutting rates and stock prices are falling. 10-year performance: 8.8%. 2020: –10.8%.
Vanguard Wellesley Income (VWINX), launched back in 1970, is the most conservative and least volatile of the mutual funds listed here. It invests 35% of its portfolio in bargain-priced blue-chip stocks that pay dividends. The rest of the portfolio is invested in high-quality corporate bonds and US Treasuries. Over the past decade, the fund has exhibited just half the volatility of the S&P 500. 10-year performance: 6.9%. 2020: –7.4%.
David Snowball, PhD, is publisher of MutualFundObserver.com, a mutual fund–analysis website that tracks 36,000 investment products. He is also a professor of communication studies at Augustana College, Rock Island, Illinois.
Two attractive low-volatility ETFs…
iShares Edge MSCI Minimum Volatility USA ETF (USMV) is the largest and best-designed of the low-volatility ETFs that cover US stocks. Launched in 2011, it seeks stocks with attractive valuations and a track record of low volatility compared with the S&P 500. With about 200 stocks, it further tamps down volatility by capping its allocation to any particular sector and stock. Five-year annualized performance: 7.7%. 2020: –17.2%, compared with an 18.7% drop in the S&P 500.
iShares Edge MSCI Minimum Volatility EAFE ETF (EFAV) uses a similar method as its sister fund above but focuses on foreign developed markets, which have been much more volatile than the US stock market. The fund holds 280 mostly large-cap stocks in 20 countries, excluding the US and Canada. Five-year annualized performance: 2.1%. 2020: –16.8%, compared with a –23.4% drop in the foreign benchmark index, the MSCI EAFE.
Neena Mishra, CFA, is ETF research director at Zacks Investment Research, Chicago. Zacks.com
*All performance data is through March 31, 2020. Long-term performance figures are 10-year annualized returns unless otherwise noted.