It’s looking like another gloomy week for global markets as investors react to a trifecta of problems, including disappointing growth data from the U.S. and China and ongoing pain in Spain. All this probably means another bumpy ride this summer. Which is why low-volatility ETFs are getting a lot of press right now.
Low-vol isn’t new in the pension space, where managers have launched a host of new products that seek to tame market movements and ease sell-off pain. For plan sponsors eager to mitigate volatility in their equity portfolios, such strategies have merited some serious consideration.
Same goes for the ETF space where low-vol products are experiencing a surge of new money as markets turn ugly again. Just last week, Forbes reported that the S&P Low Volatility Portfolio (AMEX:SPLV) saw roughly $34.5 million in inflows—a 2.0% increase week over week.
Low-vol portfolios focus on low beta stock, stocks that move less relative to the market. Low-volatility ETFs select low beta stocks from well-known indices to help shield investors in the event of a big market sell-off. But they don’t always mean investors come away from market carnage unscathed. In fact, May proved to be a very bad month for global markets and, according to ETF Database, low-volatility ETFs didn’t escape the losses. This handy article published today shows how different low-vol ETFs stacked up against the major indices during what proved to be a particularly bad month for global markets. Those low-vol products posted big losses. But they fared pretty well compared to the broad-based index funds from which they draw their holdings. So they did soften the blow, albeit not 100%.
All this to say that investors probably shouldn’t count on low-volatility ETFs for a completely smooth ride. But they can certainly look to them as a way to stay in their seats during major market drops—and this summer that might be the best we can hope for.