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3 Low Risk ETFs for Market Turmoil

Sweta Killa

The past few days have been choppy for the global financial market. Investors are dumping high growth and high beta stocks across the globe thanks to valuation concerns, profit-taking activity and some sluggish global economic indicators (read: The Momentum Stock Crash Puts These ETFs in Focus).

Hefty valuations are compelling investors to move from highflying securities, which have shown incredible performance last year, into larger, more-mature companies that pay dividends and act as a hedge against economic uncertainty. Concerns over rising interest rates sooner than expected, slowdown in China and renewed tensions in Ukraine continued to weigh on global growth and the stock market despite the gradually improving U.S. economy.

Further, gloomy expectations for Q1 earnings raised concerns on the stock market rally in the near term. As per the Zacks Earnings Trends, earnings as a whole for the S&P 500 are expected to be down 2.6% from the year-ago quarter on 1.0% higher revenues and modestly lower margins.

Earnings estimates have fallen sharply over the past three months from 2.1% growth projected in January. The weakness is broad-based with 10 of the 16 Zacks sectors expected to show earnings decline. Among the major sectors, finance, technology, energy, medical and basic materials will likely be the culprits (read: 3 ETFs Tumble Most on Biotech Sell-off).  

Given sluggish macro fundamentals and apprehension of a weak earnings season, markets are expected to remain volatile in the coming days and investors should consider low risk products in order to protect themselves from huge losses.

Below, we have highlighted three ETFs that investors could consider in their portfolios if the stock market continues to experience volatility. These funds appear to be safe in the current market turbulence, and tend to reduce risk while generating decent returns:

PowerShares S&P 500 Low Volatility Portfolio (SPLV)

This ETF provides exposure to 100 U.S. stocks with the lowest realized volatility over the past 12 months by tracking the S&P 500 Low Volatility Index. The fund is widely spread across number of securities as none of these holds more than 1.24% of assets.

However, the product is tilted toward utilities at nearly 25% share while consumer staples, financials, industrials and healthcare round off to the top five (read: 3 Utility ETFs Surviving the Market Turmoil). SPLV is the largest and the most popular ETF in the low volatility space with AUM of $3.8 billion and average daily volume of around 940,000 shares. The fund charges 25 bps in annual fees and was up about 1% in the past 10 days.

iShares MSCI All Country World Minimum Volatility ETF (ACWV)

This fund tracks the MSCI All Country World Minimum Volatility Index. Though the ETF provides exposure to low volatility stocks across the globe, U.S. accounts for more than half of the asset base. Apart from this, Japan is the only country with a double-digit allocation. The product has managed asset base of $1.1 billion while trades in light volume of less than 50,000 shares a day. Expense ratio came in at 0.20%.

Holding 598 stocks, the fund is widely spread out across each sector and security. None of the security holds more than 1.56%, and financials, healthcare, consumer staples and consumer discretionary occupy the top four positions in terms of sector with double digit allocations. The ETF added 1.30% over the last 10 days.

PowerShares S&P 500 High Dividend Portfolio (SPHD)

This fund follows the S&P 500 Low Volatility High Dividend Index, which includes U.S. stocks that historically provided high dividend yields and low volatility. The ETF holds 50 stocks in its basket and each security holds less than 3.11% of assets (see: all large cap ETFs here).

Here, utilities takes the top spot from a sector look with over 26% share, followed by consumer staples (19%) and financials (15.1%). The product has amassed $145.8 million in its asset base while volume is also light. It charges 30 bps in annual fees from investors. SPHD gained over 2% in the last 10 trading sessions and has an attractive dividend yield of 3.47%.

Bottom Line

These products are clearly outpacing the broad market fund (SPY) by wide margins, suggesting their potential to outperform in the coming days as well. This will be especially true if investors’ concerns about valuation deepen and earnings disappoint in first quarter.  

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