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Low Volatility ETFs Surge Amid Trump and Fed Worries

Sanghamitra Saha

U.S. stocks have been wavering lately thanks to a host of issues. First, tensions between President Donald Trump and North Korea’s leader Kim Jong-un are sky-high thanks to nuclear activity by the latter. Second, U.S. stocks are guilty of overvaluation concerns (read: What Does High CAPE Ratio Mean for ETF Investing?).

To add to woes, two high-profile business advisory councils were dissolved after two more CEOs resigned from the manufacturing council on Wednesday. Plus, the latest Fed minutes showed that policymakers are wary of weak inflation. However, expectations of an announcement of the normalization of the Fed’s $4.5-trillion balance sheet in September is still likely. And, a December rate hike – the third this year if enacted – is still probable (read: Asset Rollback Top Priority of Fed: ETFs in Focus).

Meanwhile, oil prices nosedived as U.S. output touched a two-year high. Housing starts dropped in July, thanks to a falloff in apartment construction. Residential starts plummeted about 5%. Moreover, housing permits, which hint at future construction, tumbled 4%.

If these were not enough, IMF has downgraded U.S. growth to 2.1% for 2017 and 2018 from the previous projections of 2.3% and 2.5%, respectively (read: ETF Winners & Losers on IMF Growth Forecast).

Lower-than-expected expansion in the fiscal policy given the ongoing political drama prompted the IMF to go for a downgrade. Major proposed reforms like the health care bill, tax cuts and defense budget increase are still way behind enactment. Plus, Trump’s inclination toward protectionism is another threat to the U.S. In a nutshell, several pro-growth promises of President Trump now look uncertain (read: Multi-Asset ETFs for Uncertain Markets).

Low Volatility ETFs Hitting Highs

Thanks to the afore-mentioned issues, market complacency appears to have wavered in recent trading. Volatility levels which have been extremely low this year, increased lately withiPath S&P 500 VIX ST Futures ETN (VXX) gaining about 5.6% in the last 10 days (as of August 16, 2017).

This sense of instability made low-volatility investments highly coveted and led the following ETFs to 52-week highs on August 16, 2017.              

SPDR SSGA US Large Cap Low Volatility ETF LGLV

The 152-stock fund looks to track the performance of the SSGA US Large Cap Low Volatility Index. The index is designed to track the performance of U.S. large capitalization companies that exhibit low volatility. The fund charges 12 bps in fees.  

PowerShares S&P 500 Low Volatility ETF SPLV

The underlying index comprises 100 stocks from the S&P 500 Index with the lowest realized volatility over the past 12 months. The fund charges 25 bps in fees (read: New Active Low Risk ETF from Cambria).

PowerShares S&P 500 ex-Rate Sensitive Low Volatility Portfolio XRLV

The 100-stock fund is based on the S&P 500 Low Volatility Rate Response Index. The index tracks stocks that have both low volatility and low interest rate risk. The fund charges 25 bps in fees.

iShares Edge MSCI Min Vol USA ETF USMV

The underlying index measures the performance of equity securities in the top 85% by market capitalization of equity securities listed on stock exchanges in the U.S. that have lower absolute volatility. The fund charges 15 bps in fees.               

iShares Edge MSCI Min Vol Global ETF ACWV

This 361-stock product offers exposure to global stocks that have lower volatility characteristics relative to the broader developed and emerging equity markets. The fund is heavy on the U.S. (55.4%) followed by Japan (12.6%). The fund charges 20 bps in fees.

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PWRSH-SP5 XRATE (XRLV): ETF Research Reports
POWERSH-SP5 LVP (SPLV): ETF Research Reports
ISHARS-MS ACW (ACWV): ETF Research Reports
ISHARS-MS US MV (USMV): ETF Research Reports
SPDR-R1000 LV (LGLV): ETF Research Reports
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