Can Low Volatility ETFs Save Your Portfolio From Market Rout?

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Includes: CVOL, EELV, EFAV, JPMV, ONEV, VIIX, VXX
by: Zacks Funds

The global stock market has seen a pretty rough start to the New Year. The Chinese market crash and the resultant sell-off in global stocks, more maddening plunges in oil prices and persistent growth worries in global superpowers are forcing the market to hit the dirt.

The contagion effect of the above issues was strong enough to make global equities see the most horrible start to a year in 16 years. Hardly any market is in the green with the key indices in the U.S. and the international markets incurring losses.

Meanwhile, Brent crude plummeted to a 12-year low while WTI crude is hovering around its seven-year low level. The estimate for the Q4 earnings season is far from upbeat with the total S&P 500 earnings in Q4 likely to be down 7.8% year over year on 4.7% lower revenues.

Estimates declined as the quarter unfolded, similar to what we observed in the last three years. Some analysts are viewing the market as oversold. Given the somber sentiments in most asset classes, investors have started to doubt if the U.S. economy can digest further Fed's policy tightening in such a wavering investing backdrop.

A broad sell-off and spike in volatility have been the market mantra giving all volatility-related ETFs unparalleled gains. C-Tracks ETN linked to Citi Volatility TR (NYSEARCA:CVOL), VelocityShares VIX ST ETN (NASDAQ:VIIX) and iPath S&P 500 VIX ST Futures ETN (NYSEARCA:VXX) have gained about 21.7%, 14.1% and 14% so far this year (as of January 13, 2016).

This has caused many investors to seek refuge in low risk products. In such a situation, 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, though not huge.

Investors should note that even low-volatility ETFs are not full-proof to the market sell-off. Still these sets of products give investors a better padding from the market upheaval than normal vanilla ETFs.

Below we highlight five low-volatility ETFs and offer key features of each so that you can find out which is best suited to look after your portfolio.

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

This brand-new ETF gives exposure to low volatility investing in large cap equity securities. The 424-stock fund is heavy on financial services (20.2%) trailed by consumer discretionary (16.62%), producer durables (15.98%) and consumer staples (12.2%). The fund charges 20 bps in fees.

S&P Emerging Markets Low Volatility Portfolio (NYSEARCA:EELV)

This ETF - tracking the S&P BMI Emerging Markets Low Volatility Index - invests about $125.3 million of assets in 201 securities from emerging markets. The Index comprises the 200 least volatile stocks of the S&P Emerging BMI plus Large Mid Cap Index over the past 12 months. The fund charges net expense ratio of 29 bps.

Taiwan takes up the top spot with 22.1% of exposure. Notably, Taiwan is a relatively well-placed nation in the emerging markets' pack. Malaysia (13.7%), South Africa (9.3%) and Mexico (8.8%) take the next three spots.

iShares MSCI Japan Minimum Volatility ETF (NYSEARCA:JPMV)

The Japanese economy may be ailing now, but the Japanese stocks are not. Plenty of cheap money from the Bank of Japan (BoJ) boosted a stock market rally in recent times. Probably, this is why a low volatility bet on the Japanese stocks is still on investors' radar.

The fund offers exposure to 174 Japanese stocks having lower volatility characteristics relative to the broader Japanese equity markets by tracking the MSCI Japan Minimum Volatility Index.

The fund is widely spread across a number of securities as none of these holds more than 1.66% of assets. The ETF is too overlooked by investors as depicted by AUM of $21.6 million. The fund charges 30 bps in annual fees.

Victory CEMP US Large Cp High Dividend Volatility Weighted ETF

The fund gives investors exposure to the highest dividend yielding stocks in the CEMP US Large Cap 500 Volatility Weighted Index. This way the fund serves up dual objectives of higher returns and lower risk.

This 100-stock ETF has amassed $23.7 million in assets so far. Utilities occupy at least one-fourth of the portfolio followed by Financials, IT, Consumer Staples and Consumer Discretionary getting double-digit exposure each. The fund charges 35 bps in fees.

iShares MSCI EAFE Minimum Volatility ETF (NYSEARCA:EFAV)

This fund targets the low volatility stocks of the developed equity markets, excluding the U.S. and Canada. In terms of country profile, Japan and United Kingdom take the top two spots at 28.3% and 24.2%, respectively, followed by Switzerland (10.52%). It is slightly tilted toward financials at 21.5%, closely followed by consumer staples (16.8%) and healthcare (16%). The fund charges 20 bps in fees.

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