Risk-conscious ETFs: Advisers can 'control their own destiny' amid volatility, analyst says

VettaFi Head of Research Todd Rosenbluth details how investors can position against market volatility and widespread losses with risk-conscious ETFs.

Video Transcript

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DAVE BRIGGS: All right, welcome back. With recent selloffs, avoiding market volatility can be a challenge for many investors. VettaFi Head of Research Todd Rosenbluth, says there are a number of risk-conscious alternatives where you can put your money to work. He joins us now for this week's "ETF Report," brought to you by Invesco QQQ. Good to see you, sir.

So investors still in shock what happened yesterday, worst day since June of 2020, fifth worst day ever on the S&P. What's the lesson? What should they learn?

TODD ROSENBLUTH: Well, if the market volatility that we saw yesterday and perhaps even throughout 2022 is causing angst for advisors and investors, then they really need to make sure they're in the lower risk strategies that are out there. So the S&P 500 was down over 4% yesterday.

The SPLV, which is Invesco's S&P 500 low volatility ETF, which holds the 100 least risky stocks traditionally within that broader S&P 500 index, that's down, or was down much less. It's actually holding up much better than the broader market because it's tilted towards the more defensive sectors like utilities, like consumer staples, like real estate.

There's another product that's out there that we're highlighting with investors from iShares. It's a minimum volatility ETF. USMV is the ticker of this iShares ETF. And USMV is also down less than the broader marketplace, but not as much as SPLV because it has exposure towards technology, towards consumer discretionary, towards some of those risk on sectors, not just the defensive sectors.

So these are the two most popular of these lower risk equity ETFs. But investors should be favoring these as opposed to just riding the wave of the market volatility and then being concerned about what happens after the fact.

RACHELLE AKUFFO: So, Todd, depending on your time horizon then, let's say if you're an investor with a long view versus one with perhaps a shorter term view or you're going to retire soon and you want to pull your money, be able to pull your money out sooner, how do those options differ in terms of what you find most attractive right now?

TODD ROSENBLUTH: So what we found historically is that it's time in the market instead of trying to time the market. So the time to be in a low volatility ETF or pairing a lower volatility ETF is ahead of the market selloff, and then sticking with it instead of having to react to it. But if you have a time horizon where you are more conscious about the downside and you want to control that environment, there's a suite of ETFs from Innovator, among others. These are defined outcome or buffer ETFs.

And one of the ones that we're highlighting is the ticker is P as in Peter, and then S-E-P for September. And this is a power buffer ETF that reduces the downside. It controls how much it has a for, or how much downside you get, but it also caps the overall upside. And you can control the risk and reward you want to be able to take, as well as the time horizon.

So these are best used for at least 12 month time horizons, because that's what the buffer is set for. But you can hold on to these ETFs for more than 12 months and continue to roll this forward over 24, over 36 months. These defined outcome ETFs can make it much easier instead of trying to have your emotions play it for you, you're able to control your destiny with this ahead of time.

SEANA SMITH: Todd, what are you hearing from advisors? Because lots of debate out there about whether or not the lows that we saw in mid-June, if that, in fact, was the lows of this recent market volatility. What do you think?

TODD ROSENBLUTH: So we actually had a webcast we had with advisors earlier today that we did, and one of the ETFs we talked about was A-L-T-L, which is a Pacer ETF tied to Lunt Capital, and it will rotate actually based on lower volatility and high beta. And what was appealing to me is we heard that is advisors are comfortable with having an approach where they can both reduce their risk side, reduce the risk profile, but also participate in some of the upside.

Advisors don't want to miss out on the gains for their clients. And so this is an ETF that again, sets the rules, just like those innovator ETFs. It sets the rules ahead of time. Advisors can know this. They can feel more comfortable understanding that they can have control of their own destiny for their advisors and have the index handle the emotions for them instead of them having to do that handholding with clients.

DAVE BRIGGS: A lot of emotion. Fixed income investors, what should their strategy be?

TODD ROSENBLUTH: Well, we're more likely to see interest rates continue to climb higher. We did another webcast and we heard from advisors last week where what they told us, is they were expecting that the Federal Reserve to be raising interest rates into 2023 and remaining elevated. And so they're more comfortable towards shorter term bond ETFs, Vanguard, a short-term corporate bond ETF, VCSH is one of those ETFs that gives you exposure to the credit market, but without having to take on that same level of interest rate sensitivity.

And we've got products from iShares, from State Street, from Invesco, as well, that offer the ability to have less interest rate risk, but also participate in the credit exposure. And again, control the destiny of your clients, working with them, instead of having them whipsawed as the Fed continues to raise interest rates.

RACHELLE AKUFFO: Whipsawed indeed. Well, lots of good options there. We do appreciate you joining us. Todd Rosenbluth, thank you for joining us this afternoon. Have a good evening.