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Low-Volatility ETFs in the Pink Despite a Bull Market

Sanghamitra Saha

U.S. markets have been in great shape in 2019, thanks to a dovish Fed and U.S.-China trade optimism. The S&P 500 has recovered sharply this year from the Christmas lull. The S&P 500 touched 2,800 for the first time in nearly four months while the Dow Jones hit its 26,000 mark in late February for the first time since Nov 9 (read: Wall Street's Best Start Since 1987: Top ETFs of Top Sectors).

The S&P 500-based ETF SPY gained 11.8% (as of Mar 4, 2019), the Dow Jones-based ETF DIA returned 10.8% and the Nasdaq-100-based fund QQQ has advanced 13.1% so far this year. The S&P 500 regained 75% of the steep drop from the high hit last September.

But these haven't been able to dim the appeal of 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 a steady position despite the highs scaled by stocks.

Why Are Low-Volatility ETFs in Good Shape?

After the astounding gains, thoughts of a correction in the market or overvaluation concerns are justifiable. This is especially true given stocks have gotten 17% pricier in two months while profits are fading.

The analysts’ earnings estimates are declining for Q1 and Q2 of 2019. Today, the consensus estimates earnings will fall 2.7% in Q1, and rise just 0.7% in the June quarter, “representing a downward swing of 4.2 points in the outlook since the start of the year,” per an article published on Fortune.  Analysts are deducing operating EPS, which is normally around 15% lower than the GAAP.

Meanwhile, global growth worries remain rife. Most of the developed economies, especially in Europe and some emerging economies, have been suffering a slowdown. China, which slowed in Q4, has recently cut its economic growth forecast for 2019 to the range of 6-6.5%, down from a target of 6.5% over the past two years. India economy also slowed in the final quarter of 2018. The Eurozone economy grew 0.2% on quarter in Q4 of 2018, which was the lowest since the Q2 of 2014.

Though there were signs of improvement in 2018, U.S.-China trade tensions are not resolved yet. These wavering factors explain why a group of investors is still stuck to low-volatility ETFs.

ETFs in Focus

Below we highlight a few low-volatility U.S. ETFs that have been in fine fettle this year despite a market rebound. These funds are currently around a 52-week high level. These ETFs have returned slightly lower than the S&P-based fund SPY this year.

SSGA US Large Cap Low Vol Index SPDR LGLV — Up 11%

S&P 500 Low Vol Invesco ETF SPLV — Up 10.7%

USA Min Vol iShares Edge MSCI ETF USMV — Up 9.7%

Investors should also note that SPDR S&P 500 ETF Trust SPY and iShares Core S&P 500 ETF IVV have seen outflows of $8.45 billion and $6.59 billion of assets this year while USMV, SPLV and LGLV have gathered about $2.7 billion, $842.5 million and $106.5 million in assets.

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SPDR Dow Jones Industrial Average ETF (DIA): ETF Research Reports
Invesco S&P 500 Low Volatility ETF (SPLV): ETF Research Reports
iShares Edge MSCI Min Vol USA ETF (USMV): ETF Research Reports
iShares Core S&P 500 ETF (IVV): ETF Research Reports
SPDR S&P 500 ETF (SPY): ETF Research Reports
SPDR SSgA US Large Cap Low Volatility Index ETF (LGLV): ETF Research Reports
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