Low-Volatility ETFs In Vogue Despite A Bull Market

by: Zacks Funds

U.S. markets may have been on cloud nine in the last one month, following an extremely volatile or rather a downbeat June, but could not leave a scar on the low-volatility ETFs. These apparently safe products - which normally do not surge in a bull market, but offer protection in troubled times - are still in fettle no matter how many highs stocks have hit.

This is because the recent ascent in the market was not at all free of fear, thanks to mounting tensions - be it Fed hike uncertainty or global growth worries, yet unseen threats from Brexit, earnings recession or oil price upheavals.

In fact, investors seem to have little faith in the recent rally, as volume remains a little weak. For example, the SPDR S&P 500 Trust ETF (NYSEARCA:SPY) added about 0.3% on August 3, after slight losses in prior days. But this rise was supported by weaker trading activity, as about 46.5 million shares exchanged hands on August 3 compared with the three-month average of 96.7 million shares.

In the chart below, we can also see that volumes of SPY in July - when it hit record highs several times - were slightly subdued than earlier months, when the fund was range-bound or was not performing soundly.

This means that fear levels were associated with the recent rises in the broader market, keeping opportunities open for low-volatility ETFs during this period.

Reasons Why Low-Volatility ETFs Were, and Will Be, in Vogue

Analysts like Goldman Sachs, Deutsche Bank and Jeffrey Gundlach, the chief executive of DoubleLine Capital do not have high hopes on the S&P 500's journey ahead. Overvaluation in stocks amid tepid corporate earnings, global macroeconomic doldrums especially in Europe and uncertainty over growth in China keep them wary.

With U.S. GDP data for the second quarter coming at 1.2% versus 2.6% expected, and factory output growth slowing somewhat in July (though it remained in growth territory for the fifth successive month) and missing estimates, questions began to arise on the health of the U.S. economy. Alongside, U.S. construction spending declined for three months in a row in June. Oil prices too became erratic as supply glut worries crept in again.

All these spawned fear over the longevity of this rally. As of August 1, 20 brokerages surveyed by Bloomberg set the average year-end target for the S&P 500 at 2,146. It was 0.8% down from the S&P 500 level of 2,163.79 as of August 3, 2016.

In such volatile times, it's prudent for investors to follow a proper trading strategy which ensures risk-on sentiments along with stability. In fact, most of the low-volatility ETFs have higher P/E ratios than that of SPY at the current level.

As per Morningstar, about $6.2 billion was invested in the iShares Edge MSCI USA Minimum Volatility ETF (NYSEARCA:USMV) in the first half of 2016, while the PowerShares S&P 500 High Dividend Low Volatility Portfolio ETF (NYSEARCA:SPHD) amassed about $1.4 billion.

Below, we highlight a few low-volatility ETFs that offered more or somewhat similar returns as SPY in the last one-month period (as of August 3, 2016). These ETFs could be in focus in the days to come.

SPDR Russell 2000 Low Volatility ETF (NYSEARCA:SMLV)

The fund delivers exposure to low volatility by investing in small-cap equity securities. SMLV charges 12 bps in fees and yields about 2.76% annually (as of August 3, 2016).

PowerShares S&P SmallCap Low Volatility Portfolio ETF (NYSEARCA:XSLV)

The fund also gives low volatility exposure to the small-cap stocks, but by tracking the S&P SmallCap 600 Low Volatility Index. The fund charges 25 bps in fees.

iShares MSCI Emerging Markets Minimum Volatility ETF (NYSEARCA:EEMV)

The fund is focused on emerging market stocks with potentially lower risk. It charges 25 bps in fees and yields 2.42% annually (as of August 3, 2016).

Compass EMP U.S. Discovery 500 Enhanced Volatility Weighted ETF (NASDAQ:CSF)

As per the issuer, "the Long/Cash Index tactically reduces its exposure to the equity markets during periods of significant market decline and reinvests when market prices have further declined or rebounded." This fund also has a small-cap focus.

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