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Low-Volatility ETFs: Slow and Steady Winning the Race


The equities markets are in rally mode, breaking new highs, but exchange traded funds tracking boring stocks that exhibit lower volatility have been outpacing the broader market.

Specifically, the utilities are the best performers this year, rising 14.5% on a total return basis year-to-date, compared with the S&P 500′s 6.4% return, reports Caroline Valetkevitch for Reuters.

Broad utilities ETFs, the Utilities Select Sector SPDR (XLU) and iShares U.S. Utilities ETF (IDU) , are up 13.6% and 13.3% year-to-date, respectively.

Conservative, “low-beta” stocks, or sectors that exhibit low volatility and tend to be less influenced by broad market moves, are picking up steam this year. It suggests that investors are worried about earnings growth and the U.S. economy, especially after U.S. gross domestic product contracted in the first quarter, the first time in three years.

“You see this all over the place – people are still scared,” Richard Bernstein, CEO of Richard Bernstein Advisors, said in the article.. “They’re still more worried about protecting to the downside than accentuating the upside.”

For example, hedge funds have 3.8 times more net cyclical exposure to defensive stocks, down from 4.7 times in January, according to Jon Kinderlerer, a managing director at Credit Suisse .

Investors interested in going the conservative route can consider the PowerShares S&P 500 Low Volatility Portfolio (SPLV) and the iShares MSCI USA Minimum Volatility ETF (USMV) , the two largest low volatility ETFs. [Use High Quality, Low Volatility ETFs to Fight Retail Sector Weakness]

USMV factors in how stocks interact with one another, weights each sector within 5 percentage points of the parent index and leans toward stocks that generate relatively stable earnings and are less sensitive to the business cycle than the broader market. SPVL, on the other hand, picks out the 100 least volatile stocks from the S&P 500. Both ETFs lean toward defensive sectors – SPLV includes 23.6% weight in utilities, 8.1% in health care and 16.3% in consumer staples while USMV has 16.5% in consumer staples, 18.2% in health care and 8.1% in utilities. [Get Defensive with Low Volatility ETFs]

For more information on market volatility, visit our volatility category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.