Will Low Volatility ETFs Regain Their Mojo?

Low volatility ETFs have long been in vogue when it comes to waiting out periods of uncertainty in the market. But recently, bond ETFs beat low volatility ETFs by quite a margin. As per Wall Street Journal, the proponent of the low-volatility strategy Robert Haugen said that low-volatility is no “substitutes for bonds” and thus offer greater protection at the time of instability (read: Can Low Volatility ETFs Beat Bonds for Portfolio Stability?).

That being said, we would like to note that the present unsteadiness in the market may be good for low volatility ETFs than bonds. We’ll tell you why.

Uncertainty Prevails

With the presidential elections just around the corner, ambiguity over the Fed rate hike timeline, the talks related to the start of the Brexit process and global growth worries, volatility levels will remain in place in the near-to-medium term (read: Will the Surge in Currency Hedged UK ETFs Continue?).

Vindicating global growth issues, International Monetary Fund (IMF) lately projected a dip in the world output growth projection at 3.1% for this year from 3.2% last year. More interestingly, the U.S. witnessed a considerable reduction in growth projections from 2.2% to 1.6%, thanks to low business investments.

Also, about a two-year high inflation level in the Euro zone lately dampened investors’ sentiment toward equities as investors started wagering on the prospect of a reduction in central brank stimulus.

If this was not enough, Fed vice-chairman Stanley Fischer recently indicated that prolonged low interest rates increase the chances of a deeper recession in the U.S. in the future. All these make low volatile or defensive ETFs prudent investment picks for now.

Rising Rate Concerns

As the possibilities of a December Fed rate hike are high now, rising rate worries will likely haunt bond ETFs and this is where low volatility products can score points over fixed income securities (read: 6 Bond ETFs to Play Higher Rates).

On a broader level, fixed-income equities are one of the non-preferred investment choices when rates rise. But low volatility ETFs are finally equities – not as risky as bonds in a rising rate environment.

Earnings Growth in the Cards

Corporate America is likely to see brighter days post Q3 earnings. As per the Earnings Trends report issued on October 12, 2016, earnings recession, which was pronounced in the last few quarters, is drawing to an end.

Earnings of the S&P 500 companies are expected to see a 5.3% expansion in Q4 and 11.7% in Q1 of next year and 10.3% in the following quarter. Revenues at the index are expected to score 1.2% in Q3, 4% in Q4, 8.3% in Q1 of 2017 and 6.7% in Q2.

From this point of view as well, equity ETFs score over bond ETFs. So, stocks that are low volatile in nature will likely protect investors’ portfolio better amid market turbulence (read: Quality ETFs and Stocks for a Market-Beating Portfolio).

ETFs in Focus

Considering the above-mentioned factors, investors may seek refuge in low-risk products. These low-volatility products could be intriguing choices for those who want to stay invested in domestic equities, but like the idea of focusing on minimum volatility. Low volatility ETFs generally tend to offer positive risk-adjusted gains, even if not monumental.

Below we highlight a few ETF options that are likely to be in focus:

SPDR Russell 1000 Low Volatility Focus ETF (LON:ONEV)

The fund delivers exposure to low volatility by investing in large cap equity securities. Financial services (22.71%), Consumer Discretionary (21.21%) and Producer Durables (15.83%) are the top three sectors of the fund.

PowerShares S&P MidCap Low Volatility Portfolio ETF XMLV

This ETF looks to follow the S&P MidCap 400 Low Volatility Index. Real Estate (28.5%), Financials (20.5%) and Utilities (16.29%) are the top three sectors of the fund.

The Legg Mason Low Volatility High Dividend ETF LVHD

The fund consists of equity securities of U.S. companies with relatively high yield and low price and earnings volatility. Utilities (22.9%), Financials (19.2%) and Industrials (14.3%) take the top three spots in the fund.

SPDR Russell 2000 Low Volatility ETF SMLV

The fund is designed to deliver exposure to low volatility by investing in small cap equity securities. Financial services (63.57%), Producer Durables (12.85%) and Utilities (6.19%) are the top three sectors of the fund.

iShares MSCI All Country World Minimum Volatility ETF ACWV

The fund provides exposure to low volatility stocks across the globe, U.S. accounts for more than half of the asset base. Apart from this, Japan is the only country with a double-digit allocation. Health Care (16.79%), Financials (16.73%) and Consumer Staples (15.17%) are the top three sectors with double-digit allocation each.

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