It’s natural to worry about a looming S&P 500 stock correction — especially after an 84% rally from the 2020 lows, and signs of froth. And some ETFs claim to help with such correction anxiety, but their track record is mixed at best.
So-called low volatility ETFs, such as iShares MSCI USA Min Vol Factor (USMV) and Invesco S&P 500 Low Volatility (SPLV), attempt to smooth out rocky times in the markets. But their methods, and success, vary wildly.
“The stock market will need to correct soon before climbing higher, as many market indicators are near extreme levels,” said Todd Rosenbluth, head of ETF and mutual fund research at consulting and ratings firm CFRA. “Lower volatility approaches have historically, but not always, provided more downside protection.”
Is A Correction To The S&P 500 Coming?
Many S&P 500 investors fear gravity is due to pull stocks down.
Stocks are already up 4.8% in a month’s time through Wednesday, putting $2 trillion of wealth into portfolios, says Wilshire Associates. And stocks are roughly 20% higher now than they were at the peak prior to the pandemic outbreak. That padded investors’ paper wealth by more than $7 trillion.
Recent economic data only fans the fears of a correction, says Sam Stovall, market strategist at CFRA. “It’s not a question of ‘if,’ but ‘when,’ the next meaningful market decline will occur,” Stovall said.
A flurry of indications point to the coming correction, Stovall says. That includes the S&P 500’s market value soaring to an all-time high of 140% of nominal GDP. Normally, S&P 500 stocks’ value is only 62% of GDP.
Additionally, margin debt is at records and small-cap stocks are at nosebleed levels of 40% above their average price over the past 200 days. And high-octane growth stock are soaring past cyclical value ones at levels not seen since the 2000 bear market, Stovall says.
Some investors may want to soften any volatility. And low-volatility ETFs tout their ability to do that. But many didn’t deliver.
Low Volatility ETFs: What Do They Hold?
Low volatility ETFs often focus on S&P 500 stocks and sectors known for putting investors through fewer ups and downs.
Typically that means holding more health care stocks. Health care companies, which see steady demand in good times and bad, tend to feature stocks that swing less during corrections, Rosenbluth says. Meanwhile, these ETFs usually underweight technology stocks, which tend to be more volatile.
Low volatility ETFs also modify holdings to try to tamp down drama. The largest low-volatility ETF, iShares MSCI USA Min Vol Factor with $29 billion in assets, spreads its portfolio across a wider range of industries than Invesco S&P Low Volatility, Rosenbluth says. It does this by holding the least volatile stocks in a sector, even if the sector itself is volatile. Microsoft (MSFT) is its top holding at 1.7%.
In contrast, Invesco’s ETF reflects the S&P 500 Low Volatility Index. Its top holding is Verizon Communications (VZ) at 1.6%. SPLV holds more health care stocks than USMV, but less technology.
Low Volatility ETFs: Do They Make Sense Vs. S&P 500?
Low volatility ETFs usually do what they profess, Rosenbluth says. The S&P 500 Low Volatility Index generated less volatility than the S&P 500 in the past three, five and 10 years. To be sure, returns are lower, too.
But they don’t always work as billed. Only half of the top 10 largest ETFs in ETF Database’s Low Volatility category dropped less than the S&P 500’s 30.6% fall from the pre-pandemic high on Feb. 19, 2020 through the low on March 23, 2020. That’s because they underweight technology, which was actually the “safe” sector during the pandemic. Investors pulled money from many of the ETFs out of disappointment, Rosenbluth says.
And low-volatility ETFs aren’t likely to tamp down volatility despite their catchy names, says Dave Nadig, director of research at ETFTrends.com. “The current market cycle we’re in is still very much higher growth, higher inflation, higher long rates. Low (volatility) isn’t positioned well for that,” he said.
Largest Low Volatility ETFs
Many didn’t hold up better than the S&P 500 in the pandemic crash of 2020
|ETF||Symbol||Assets ($ Billions)||Price 12-Month % Ch.||Coronavirus Pandemic Crash % Ch.*||Expense Ratio|
|iShares MSCI USA Min Vol Factor||(USMV)||$29.2||-0.9%||-31.3%||0.15%|
|JPMorgan Ultra-Short Income||(JPST)||16.1||0.5%||-3.0%||0.18%|
|iShares MSCI EAFE Min Vol Factor||(EFAV)||9.9||1.1%||-24.2%||0.20%|
|Invesco S&P 500 Low Volatility||(SPLV)||7.9||-7.9%||-34.8%||0.25%|
|iShares MSCI Global Min Vol Factor||(ACWV)||5.6||-0.4%||-26.8%||0.20%|
|iShares MSCI Emerging Markets Min Vol Factor||(EEMV)||4.3||16.7%||-21.9%||0.25%|
|Janus Henderson Short Duration Income||(VNLA)||3.1||0.7%||-3.1%||0.26%|
|Invesco S&P 500 High Dividend Low Volatility||(SPHD)||2.7||-3.7%||-39.1%||0.30%|
|Invesco S&P MidCap Low Volatility||(XMLV)||1.7||-6.1%||-39.1%||0.25%|
|Invesco S&P SmallCap Low Volatility||(XSLV)||1.5||-9.0%||-43.8%||0.25%|
Sources: IBD, ETF Database, S&P Global Market Intelligence through Feb. 24, * from Feb. 19, 2020 to March 23, 2020
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