Low-Volatility ETFs Prove Their Worth

This year could be summed up in one word – seasick. After a smooth 2017, 2018 has been marked by some pretty hefty volatility. Wild market swings are back as investors are starting to factor in a slowing economy, geopolitical events and less-than-bullish data into their valuations. And because of that, the markets have been choppy to say the least.For some investors – especially those on the cusp or in retirement – this choppiness is a bit much to handle. Afterall, time heals all volatility wounds. But if you don’t have the timeline, higher volatility is a killer. However, ETFs can help on this front.So-called low-volatility ETFs have continued to prove their worth over the last year including the latest market downturn. For older investors, making a big play on these funds could help them get through the current malaise and capture some of the market’s upside. Fleeing to cash may not be needed.Sign up for ETFdb.com Pro and get access to real-time ratings on over 1,900 U.S.-listed ETFs.Volatility Is RisingAfter multiple quarters of smooth sailing, the market’s waters are starting to be a bit wavy. A variety of factors have contributed to the overall feeling of nervousness. On one hand, we’ve seen the SPDR S&P 500 ETF (SPY A) jump more than 250% since its recession lows. On the other hand, that continued bullishness has been meet with a variety of bearish data points. Valuations are stretched and guidance/revenue numbers have begun to dip. Geopolitical problems and slowdowns in key emerging markets have started to have their way with global growth.Investors have a right to be on edge. With that, the popular gauge of volatility – the CBOE Volatility Index (VIX) – spiked more than 81% during the first quarter alone and jumped again during the recent October/November swoon. And while VIX has dipped lower in recent weeks, it’s still higher than it has been over the course of 2018. Volatility is here to stay.That’s kind of a problem for older investors. The reason is that big swings ultimately can hinder returns and reduce balances. Even worse is that the bigger the swing, the more they hurt. A 50% drop requires a 100% gain in order to break even. In order to do that and break even, it takes a long timeline. For some in retirement – those who are actively withdrawing money to live on – this fact could be thought of as a death sentence.Low-Volatility ETFs to the RescueFor older investors, smoothing out the ride is critical. If you can reduce the drawdowns, then the market’s swoons don’t feel as bad for your portfolio and you’re able to recover that much faster. This is where the low volatility factor and ETFs comes into play.Depending on how they are structured, most low-vol ETFs swap out “bouncier” stocks within various indexes for those which have a smoother ride. By doing this, investors capture much of the market’s upside, while reducing these downside slides. And there’s plenty of research that shows this is true.According to asset manager Invesco, it’s fairly common for the S&P 500 to experience corrections that are greater than 5%. In fact, since April of 2011, there have been 15 such declines and they’ve happened every year except 2017. In all but one of these periods, the S&P 500 Low Volatility index outperformed the S&P 500. During these drawdowns, the bread and butter S&P 500 lost an average of 9.01%. However, the low-volatility version of the index only managed to lose an average of 4.71%.And the effect doesn’t just work for large-cap stocks. This chart from BlackRock, which looks at the MSCI USA Minimum Volatility (USD) Index, a metric that covers the entire market, shows that drawdowns are smaller across the board.The important thing is that lower drawdowns take less effort and time to recover from. For those in retirement, this helps keep balances high and your golden years golden. Moreover, low-vol indexes still managed to capture much of the market’s upside as well. You can have your cake and eat it too.Adding Some Low-Vol MuscleClearly, low-volatility ETFs have a place in many investors’ portfolios. By switching out core holdings for these funds, older investors in or near retirement can potentially sleep easier and still get competitive returns. And Wall Street has answered the call. There are plenty of ETFs that target low-vol strategies. However, only a couple have proven their worth.Two of the best continue to be iShares Edge MSCI Min Vol USA ETF (USMV A) and Invesco S&P 500 Low Volatility ETF (SPLV A). Both these ETFs track the previously mentioned indexes above. USMV provides total market exposure, while SPLV strictly focuses on large stocks. There are a few other ETFs that focus on the small- and mid-cap space. However, they have yet to garner the attention that these two funds have. Investors should start their search with SPLV and USMV when it comes to building a low-vol portfolio.Learn more about low-vol ETFs here.Perhaps one of the places that low-volatility strategies shine is in overseas markets. Emerging and developed markets tend to be more volatile anyway, so reducing choppiness here provides plenty of additional benefit. Both the iShares Edge MSCI Min Vol (EFAV A) and iShares Edge MSCI Min Vol Emerging Markets ETF (EEMV A+) make adding the strategy easy to implement.Incidentally, dividend-paying stocks tend to be less volatile than non-dividend payers. Investors tend to value constant payouts and this prevents shares from moving as much as the broader market. Simply adding a dividend ETF like the Vanguard High Dividend Yield ETF (VYM A+) may actually help reduce a portfolio’s volatility without much effort.The Bottom LineIt’s no secret that the markets have gotten choppy. For those investors in retirement, this is a huge problem. Reducing a portfolio’s movement is key to long-lasting and better returns. To that end, low-volatility ETFs can make a huge difference in a portfolio.Be sure to visit our News section to keep track of the latest events.

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