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ETFs To Play The Market During More Volatile Conditions

The markets are experiencing greater volatility. More conservative investors may take a look at low-volatility ETF related strategies. Low-vol ETF strategies for domestic and international markets. With the sudden bout of volatility shaking up the markets from its listless first half, more conservative investors may consider exchange traded funds that track a low-volatility strategy. Market watchers argue that investors should get used to stock volatility as it is here to stay for some time, reports Michelle Fox for CNBC . Fueling the risk, the escalation in the Greek debt crisis and a major sell-off in Chinese markets sent global markets reeling. “People are not taking a lot of risk right now. There are too many cross-currents right now to really take a big position out there,” Brian Kelly, founder of Brian Kelly Capital, said on CNBC. “Yes, potentially we get some kind of deal in Greece but then it’s unclear exactly what the damage has been done in China.” Consequently, retail investors have been hesitant on joining the market as market swings remain a major concern. Nevertheless, there are a number of low-volatility ETFs available that track more steady segments of the markets. For instance, over the past month, the PowerShares S&P 500 Low Volatility Portfolio ETF (NYSEARCA: SPLV ) , which tracks the 100 least volatile stocks on the S&P 500, rose 1.3% and the iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ) , which selects stocks based on variances and correlations, along with other risk factors, rose 0.9%. In contrast, the S&P 500 has declined 1.2% over the past month. “Low-volatility stocks have historically offered higher risk-adjusted returns than their more-volatile counterparts, suggesting that the market has not offered adequate compensation for incremental risk,” according to Morningstar analyst Michael Rawson. ETF investors can also take the low volatility theme to overseas markets. The low-volatility ETFs have helped soften the blow from the global sell-off. For example, the PowerShares S&P International Developed Low Volatility Portfolio ETF (NYSEARCA: IDLV ) and the iShares MSCI EAFE Minimum Volatility ETF (NYSEARCA: EFAV ) provide a low-volatile option for developed overseas markets. Over the past month, IDLV dipped 2.8% and EFAV fell 1.4% while the iShares MSCI EAFE ETF (NYSEARCA: EFA ) declined 2.9%. Additionally, investors can target emerging market exposure through the iShares MSCI Emerging Markets Minimum Volatility ETF (NYSEARCA: EEMV ) and the PowerShares S&P Emerging Markets Low Volatility Portfolio ETF (NYSEARCA: EELV ) . Over the past month, EELV was down 3.4% and EELV was 3.1% lower while the iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ) retreated 5.2%. Max Chen contributed to this article . Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Weather Fed Rate Hike Fears With Global Low-Volatility ETFs

The Fed rate hike possibility probably never appeared as strong as it seems now. A better-than-expected job data recently along with strong manufacturing, construction spending and automobile sales confirmed the passage of winter blues and solid recovery in the U.S. economy. This has bolstered market sentiments that the Fed will normalize its interest rate policy this September or October. The market has already started to position itself for a September lift-off timeline as bond yields took an upturn. Higher interest rates might derail the stock market rally as many investors will now throng to the fixed-income world in search of high current income. Not only this, the ripples of the Fed tightening will spread into several corners of the investing universe. Most importantly, emerging economies which enjoyed prolonged easy money inflows will now be spots of vulnerability. The International Monetary Fund’s deputy managing director recently cautioned of “considerable” downside risks associated with the rippling effect of looming Fed rate hike, per Reuters. Several markets and asset classes will likely see disruptions once the decision is taken. To add to this, the rest of the developed world is yet to gain ground and the Greek debt concern seems a constant worry in the Euro zone. In such a baffling backdrop, seeking refuge in low volatility products rather than sticking to highly risky options and enduring the Fed-infused storm can help investors. Since the effect of the Fed rate hike will not be limited to the U.S. market, investors can choose from across the global options. These global low-volatility products could be intriguing choices for those who want to stay invested in equities, but like the idea of focusing on minimum volatility. Low-volatility ETFs generally tend to offer positive risk-adjusted gains, though not enormous. iShares MSCI EAFE Minimum Volatility ETF (NYSEARCA: EFAV ) EFAV looks to replicate the performance of international equity securities that have lower absolute volatility. This equal-weighted ETF invests about $2.5 billion in 205 holdings. No single stock makes up more than 1.53% of the portfolio. Country wise, the fund appears more focused on Japan and United Kingdom equities, with the duo having a little less than 50% allocation in the fund. EFAV charges about 20 bps in fees. So far this year (as of June 8, 2015), the fund is up 8%. It currently carries a Zacks ETF Rank #3 (Hold) with a Low risk outlook. iShares MSCI All Country Asia ex-Japan Minimum Volatility ETF (NYSEARCA: AXJV ) This fund, just a year old, follows the MSCI AC Asia ex-Japan Minimum Volatility (USD) Index and intends to offer better risk-adjusted returns to investors. The $5.4 million-product is heavy on nations like China, Taiwan and South Korea while sectors like financials, technology and industrials take up big chunks. AXJV has about 184 securities in total in its basket and charges 35 bps in fees for its service. Individual holdings wise, the fund is quite diversified considering that no stock accounts for more than 1.95% of the basket. The top three holdings – Dr. Reddy’s Laboratories, BOC Hong Kong Holdings and AIA Group combine to take up roughly 5.2% of assets. The Zacks Rank #3 ETF is up 7.9% in the year-to-date frame. iShares MSCI Europe Minimum Volatility ETF (NYSEARCA: EUMV ) This fund has accumulated $9.8 million within one year of operation. It tracks the MSCI Europe Minimum Volatility Index giving exposure to 126 European stocks having lower volatility characteristics relative to the broader European developed equity markets. The product charges a bit cheaper fee of 25 bps a year while average daily volume is paltry at about 6,000 shares causing relatively high trading costs. Like many other funds in the space, the ETF provides higher diversification benefits with none of the securities making up for more than 1.59% of assets. In term of country exposure, United Kingdom takes the largest share at 35.61%, followed by Switzerland (17.96%), Germany (10.3%) and France (10.2%). The fund is up 6.4% so far this year (as of June 8, 2015) and has a Zacks ETF Rank #2 (Buy). VelocityShares Equal Risk Weighted Large Cap ETF (NASDAQ: ERW ) ERW tracks the VelocityShares Equal Risk Weighted Large Cap Index. This index uses a methodology to measure a stock’s risk and then distributes the risk in each of its stock equally by weighing their risk exposure individually. The index comprises most of the S&P 500 Index stocks, but individual exposure depends on their expected risk. The stocks with lower expected risk will account for a percentage of the index that is larger than in the S&P 500. This overlooked fund has managed to amass an asset base of nearly $2.6 million. The fund charges a fee of 65 basis points annually and has returned 4.5% so far this year (as of June 8, 2015) while SPY has added about 1.4% during the same time frame. ERW has a Zacks ETF Rank #3. Original Post

Weathering Market Volatility With Smart Beta

In my post on smart beta predictions for the year , I suggested that a minimum volatility (min vol) strategy would be top of mind for investors. It hasn’t taken long for that trend to materialize, as this segment posted strong returns and enjoyed inflows of $1.9 billion in the first month of 2015 (Source: Bloomberg; BlackRock ETP Landscape Report). In today’s market climate – where volatility has moved from historical lows to above long-term averages in just a few short months – the case for min vol is particularly timely. A strategy for market ups and downs Like all smart beta strategies, min vol blends aspects of traditional active and passive investing: active in that the strategies attempt to improve risk-adjusted return; passive in that portfolio construction is generally objective and based on pre-set rules. The chart below illustrates this asymmetrical behavior: for example, over the last five years, the MSCI US Minimum Volatility Index has experienced only 47% of the downside return of the standard MSCI USA Index, but captured 77% of the upside. This potential for downside protection and upside participation is how min vol portfolios have delivered strong risk adjusted returns over the long term, with smaller bumps in the road. Upside Vs. Downside Capture for MSCI Minimum Volatility Indices I like to think of min vol as being similar to windbreaker. It can help provide some protection against the sun without being too hot. And when it rains, you have something to help keep you dry. It’s an item you keep with you all year to help guard against different kinds of weather. Weathering the storm My colleague Russ Koesterich points out that volatility is back, and likely here to stay awhile . That’s a change from last year: The VIX fell well below its long-term average of 13.6 in the first half of the year before spiking above 25 in October and has remained elevated since (Source: Thomson Reuters, BlackRock Investment Institute). Against that backdrop, the MSCI U.S. Minimum Volatility Index slightly lagged the S&P 500 for the first three quarters of the year before roaring ahead to end 2015 at 16.5%, compared to the S&P’s 13.7%. But if you take away any stats from this story, here’s the most important one: The MSCI U.S. Minimum Volatility Index was 34% less volatile than the S&P 500 over that same one-year period. Min vol strategies have historically performed well in volatile times. The chart below plots the VIX Index in red – a commonly used metric of market volatility. The blue bars represent the monthly performance difference between the MSCI USA Minimum Volatility Index and the S&P 500 Index. Historically the min vol index has generally out-performed the S&P 500 in months when volatility was rising. What about when volatility abates? By limiting the downside during the deepest troughs, the min vol index was better able to capitalize on a rebound. . . In today’s more turbulent market environment, the lower volatility sought by min vol strategies is particularly appealing to many investors. In January alone, the S&P 500 has experienced a daily change of over 1% in 8 out of 20 trading days, or 40% of the time. As my colleague Nelli Oster explores in her posts on investor behavior, it can be difficult to tune out that degree of volatility and stay focused on your long-term investment goals: paying for college, saving for retirement or planning to expand your family. Where we go from here Volatility is born from uncertainty: the heightened level of risk we see in capital markets is driven by the divergence across today’s global economy. The catalysts for that divergence – conflicting central bank actions, disparate levels of economic growth across the globe and a long list of geopolitical risks – are unlikely to dissipate any time soon. This means that market volatility will likely remain elevated. I like minimum volatility for the long haul. It’s a way to participate in equity markets with the potential for less volatility and allows you to stay focused on your investment goals even in turbulent times. As market bumps are a daily reality, min vol may be an appealing investment solution, and can help keep both you and your investment strategy on track. Original Post