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Why You Should Bet on Low Volatility ETFs in June

Sweta Killa

Though the Wall Street displayed momentum to start June after Fed Chair Jerome Powell signaled its openness to cut rates if needed, trade tensions and fears of a global recession will continue to play foul on the stock market.

This is especially true in the wake of escalating trade tensions with China and Mexico, which are expected to bring more volatility and uncertainty in the stock market this month. The tariff talks between the United States and Mexico in Washington ended without an agreement on Jun 5 (read: 6 ETFs for June).

Additionally, bouts of weak data across the globe and an inverted yield curve added to the grim outlook for recession. Factory activity contracted in United States, Europe and Asia last month due to a deepening trade dispute between Washington and Beijing, which raised fears of a global economic downturn. Further, the World Bank this week slashed its global growth outlook from 2.9% projected in January to 2.6% — the slowest growth in three years — citing trade conflicts, financial strains and unexpectedly sharp slowdown in wealthier countries.

Moreover, investors should not feel overconfident in the bounce off the big May decline, if history is any guide. According to a CNBC analysis of Kensho, the S&P 500 has traded positively only 55% of the times in the month of June, losing 0.5% on average over the past 30 years. The Dow Jones has lost 0.8% on average with a negative trade 60% of the times. Meanwhile, the Nasdaq has traded positively 48% of the time, eking out a gain of 0.44%.

Against such a backdrop, those seeking to remain invested in the equity world could consider low-risk ETFs by picking low volatility products.

Why?

Low volatility ETFs have the potential to outpace the broader market in bearish conditions or in an uncertain environment providing significant protection to the portfolio. This is because these funds include more stable stocks that have experienced the least price movement in their portfolio. Further, these allocate more to defensive sectors that usually have a higher distribution yield than the broader markets (read: Low-Volatility ETFs Trading at a 52-Week High).

Below we have presented five ETFs that could be solid options for investors in the current choppy market:

iShares Edge MSCI Min Vol USA ETF USMV

This fund offers exposure to 214 U.S. stocks having lower volatility characteristics than the broader U.S. equity market by tracking the MSCI USA Minimum Volatility Index. It is well spread out across a number of securities, with none holding more than 1.7% of the assets. From a sector look, information technology, financials, consumer staples, healthcare and consumer discretionary take the top five spots with a double-digit allocation each. With AUM of $27.1 billion, the product charges 0.15% in expense ratio and trades in solid average daily volume of 27.1 million shares. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

Invesco S&P 500 Low Volatility ETF SPLV

This ETF provides exposure to stocks with the lowest realized volatility over the past 12 months. It tracks the S&P 500 Low Volatility Index and holds 100 securities in its basket with none accounting for more than 1.23% of the assets. Utilities, financials, and real estate make up the top three sectors with a double-digit allocation each. SPLV has amassed $11.1 billion in its asset base and trades in heavy volume of around 3.2 million shares a day on average. It charges 25 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook (read: Markets & ETFs Digest Trade Spat: Is It a Dead-Cat-Bounce?).

SPDR Russell 1000 Low Volatility Focus ETF ONEV

This fund follows the Russell 1000 Low Volatility Focused Factor Index and focuses on stocks that exhibit low volatility and offer downside protection. It holds 417 securities in its basket, with none accounting for more than 1% of assets. Financial services, consumer discretionary and producer durables are the top three sectors with a double-digit allocation each. The ETF has AUM of $501.7 million and charges 20 bps in annual fees. It trades in average daily volume of about 5,000 shares and has a Zacks ETF Rank #3.

SPDR SSGA US Large Cap Low Volatility Index ETF LGLV

This product tracks the SSGA US Large Cap Low Volatility Index, holding 126 stocks, with each accounting for less than 2% of assets. Financials dominates the fund’s returns with one-third share, while information technology and industrials receive double-digit exposure each. LGLV has amassed $462.6 million in its asset base and charges 12 bps in annual fees. Volume is lower, exchanging 48,000 shares in hand on average.

Fidelity Low Volatility Factor ETF FDLO

This fund offers exposure to stocks with lower volatility than the broader market by tracking the Fidelity U.S. Low Volatility Factor Index. Holding 128 stocks in its basket, it is well spread across components, with none accounting for more than 3.74% share. From a sector look, the ETF is skewed toward the information technology sector at 20.8% while financials, healthcare, and consumer discretionary round off the next three spots with a double-digit allocation each. The fund has been able to garner $193 million in AUM so far and average daily volume is also moderate at 55,000 shares. FDLO charges 29 bps in annual fees from investors (read: Trade War Leading to Global Recession? ETFs in Focus).

Bottom Line

These products could be worthwhile for low-risk-tolerance investors and have the potential to outperform the broader market, especially if trade fears continue to dent sentiments.

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