2 Low Volatility ETFs For A Defensive Approach To Equity Investing

  • Editors Pick

Wall Street has been on high alert in recent months as an array of headwinds has roiled investors—and markets. For starters, following the interest rate hike of March 16, the Federal Reserve made clear it will not hesitate to increase rates further as the US central bank tries to curb the red-hot inflation level.

Meanwhile, Brent and WTI crude prices are near record highs. As well, geopolitical concerns and the supply chain crisis show no signs of abating, either.

Currently, the CBOE Volatility Index (VIX), also known as the “fear index,” is hovering around 20.80, up more than 20% since January. However, it has come off the recent highs hit in early March.

Nonetheless, volatility has become the new market buzzword. As a result, risk-averse investors are looking for stocks and exchange-traded funds (ETFs) that could help them navigate the choppy waters.

Research by SPGI suggests:

“Low volatility has become an important factor in the 10 years since the 2008 financial crisis… [L]ow volatility stocks, by definition, exhibit lower risk, but they have also outperformed their benchmarks over time.”

Thus, today’s article introduces two funds that could appeal to readers in search of less risky investment vehicles.

1. Invesco S&P 500 High Dividend Low Volatility ETF

  • Current Price: $47.15
  • 52-week range: $41.50 - $47.17
  • Dividend yield: 3.30%
  • Expense ratio: 0.30% per year

Our first fund, the Invesco S&P 500® High Dividend Low Volatility ETF (NYSE: SPHD ), provides exposure to some of the S&P 500 's high dividend payers that, at the same time, are less volatile SPX stocks. Since its inception in October 2012, the fund’s net assets have reached $3.4 billion.

SPHD Weekly

SPHD, which follows the dividend-yield-weighted S&P 500 Low Volatility High Dividend Index, currently has 52 holdings

Regarding sectoral allocations, we see utilities (20.82%), consumer staples (18.65%), real estate (12.16%), healthcare (11.34), energy (9.56%), and materials (7.73%). Meanwhile, over a quarter of the portfolio is in the top 10 names.

Energy infrastructure stocks Williams Companies (NYSE: WMB ) and Kinder Morgan (NYSE: KMI ); smokable products manufacturer Altria Group (NYSE: MO ); oil major Chevron (NYSE: CVX ); telecom giant AT&T (NYSE: T ); and utility heavyweight PPL Corporation (NYSE: PPL ) comprise the leading holdings.

The ETF is up almost 4.1% year-to-date (YTD) and over 9% in the past 12 months. Forward price-to-earnings (P/E) and price-to-book (P/B) ratios stand at 13.90x and 2.25x, respectively.

SPHD hit a record high on Mar. 25. Finding an all-weather ETF in a volatile environment is not always an easy task. However, we like the diversity and the yield of the fund. Yet, given the recent run-up in price, a potential decline toward the $46.5 or below level would improve the margin of safety for buy-and-hold investors.

2. iShares MSCI USA Min Vol Factor ETF

  • Current Price: $76.78
  • 52-week range: $67.65 - $81.33
  • Dividend yield: 1.33%
  • Expense ratio: 0.15% per year

Next on our list is the iShares MSCI USA Min Vol Factor ETF (NYSE: USMV ), which also gives access to US equities with relatively lower volatility characteristics compared to the broader market.

In other words, the fund invests in stocks with low beta, which is a statistical measure of volatility. Most of our readers would know that the beta of the S&P 500 Index is taken as 1.0.

Therefore, a low-beta stock would have a beta under 1.0 and waver less than the S&P 500 over time. Let’s assume a stock has a beta of 0.9. If the broader market moves by 1.0%, then the stock would be expected to move by 0.9%.

USMV Weekly

This popular ETF has amassed net assets of $27.9 billion since its inception in October 2011. USMV currently holds 172 stocks, where the top 10 account for almost 16% of the portfolio.

Information technology names lead the fund with 22.91%. Next, we see healthcare (18.12%), consumer staples (11.31%), communication (10.37%), industrials (8.75%), utilities (7.98%), and financials (7.66%).

Prominent grocer Kroger (NYSE: KR ); healthcare behemoth Johnson & Johnson (NYSE: JNJ ); Warren Buffett’s Berkshire Hathaway (NYSE: BRKb ); biotechnology name Regeneron Pharmaceuticals (NASDAQ: REGN ); and gold producer Newmont Goldcorp (NYSE: NEM ) lead the names on the roster.

The fund is down around 5% since January but has returned 10.5% over the past 52 weeks. It hit a record high in late December 2021.

USMV is currently changing hands at 23.73 times trailing earnings and 4.58x book value. Readers searching for a defensive approach to equities should research the fund further.

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