Minimum volatility ETFs have gained a great deal of notoriety in the last several years for their conservative approach to selecting stocks with lower price fluctuations than their peers.
Investors that are concerned about the recent unpredictability in the stock market may want to consider these vehicles for steady capital appreciation in light of intensified turmoil in high beta sectors.
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Because of their defensive posture and focus on stable companies, many of these low volatility ETFs are breaking out to new highs this week and continuing to show strong relative momentum.
The first ETF to introduce this concept back in 2011 is the PowerShares S&P 500 Low Volatility Portfolio (NYSE:SPLV). This ETF is made up of 100 stocks from the S&P 500 Index with the lowest realized volatility over the last 12 months. The fund is then rebalanced quarterly and equally weighted to ensure that the constituents conform to the index specifications.
Not surprisingly, the largest sector allocations in SPLV are utilities and consumer staples, which are known for their stalwart dividends and steady business models. As a result, SPLV has a healthy dividend yield of 2.47 percent, and distributions are paid monthly to shareholders.
So far this year, SPLV has gained 3.98 percent, which is more than double the 1.45 percent return of the SPDR S&P 500 ETF (NYSE:SPY). In addition, this fund just recently hit a new all-time high.
Investors that are looking for an international low volatility portfolio may want to consider the iShares MSCI EAFE Minimum Volatility ETF (NYSE:EFAV). This ETF gives you exposure to approximately 190 stocks in Europe, Australia, Asia and the Far East and uses similar volatility screening characteristics as SPLV.
The largest sector weightings in EFAV favor financials and consumer staple stocks. In addition, the principal country weightings are split between the United Kingdom and Japan.
Year-to-date, EFAV has gained 4.98 percent and may benefit from additional strength in developed European economies if the recovery continues as planned.
Another similar low volatility strategy that includes both domestic and international stocks is the iShares MSCI Global Minimum Volatility ETF (NYSE:ACWV).
Conservative investors who do decide to implement a low volatility equity strategy in their portfolio should be aware that these ETFs may underperform during periods when high growth sectors are flying. That being said, they still provide diversified exposure to high quality companies in a single investment vehicle.
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