(Yahoo! Finance) Investors have been pouring a lot of money into low volatility ETFs that tend to perform well in a volatile market environment. And volatility is expected to stay at elevated levels in the coming weeks with rising trade tensions and slowing global growth. These ETFs underperform the broader indexes during strong bull markets but hold up relatively well during market declines.
According to traditional finance theories, investors demand a higher rate of return for taking on greater risks but academic studies show that lower risk stocks have rewarded investors with higher risk-adjusted returns than the broader markets over longer-term.
Low-volatility anomaly was overserved in almost all stock markets around the globe. Investors tend to chase hot, riskier stocks, and ignore low-risk, cheap stocks and thus misprice risk.
The two most popular low volatility ETFs--iShares Edge MSCI Min Vol USA ETF (USMV) and Invesco S&P 500 Low Volatility ETF (SPLV)—take different approaches in selecting their holdings.
USMV holds stocks that, in the aggregate, have lower volatility compared to the broader market. It takes into consideration correlation between stocks in addition to volatility. SPLV selects 100 stocks from the S&P 500 index that have the lowest realized volatility in the past 12 months and weights them according to their volatility.
USMV’s top holdings include Newmont Mining (NEM) Waste Management (WM) McDonald's (MCD) and Visa (V). SPLV’s top holdings are Republic Services (RSG) and NextEra Energy (NEE)
Both these ETFs have performed remarkably well relative to the broader market this year as well as in the past five years.