Volatility in the stock market has intensified due to rising inflation fears, uncertainty surrounding future Fed rate cuts and ambiguity over Trump’s tariff policies. This combination of factors has led to a second consecutive weekly decline for the S&P 500, Dow Jones Industrial Average and Nasdaq Composite. The domestically focused small-cap Russell 2000 index slipped into correction territory, declining 10.4% from its Nov. 25 peak. Meanwhile, Wall Street's fear gauge hit a three-week high on Friday.
Against such a backdrop, investors seeking to remain invested in the equity world could consider low-volatility ETFs. These funds — iShares MSCI USA Min Vol Factor ETF USMV, Invesco S&P 500 Low Volatility ETF SPLV, Invesco S&P 500 High Dividend Low Volatility ETF SPHD, SPDR SSGA US Large Cap Low Volatility Index ETF LGLV and Invesco S&P SmallCap Low Volatility ETF XSLV — could be solid options for investors in the current choppy market.
Low-volatility ETFs have the potential to outpace the broader market 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.
Current Market Trends
The bouts of upbeat data have sparked fears of inflation and cast doubt on further interest rate cuts. The latest job report shows that the United States added better-than-expected 256,000 jobs in December and unemployment dropped to 4.1% from 4.2% in November. U.S. manufacturing activity also showed signs of improvement in the final month of 2024. This is especially true as the Institute for Supply Management (ISM) said its manufacturing PMI increased to 49.3 last month, the highest reading since March, from 48.4 in November. This suggests that production is rebounding and orders are rising, indicating the good health of the economy.
A recent surge in Treasury yields is also weighing on the stock market as higher yields increase borrowing costs for companies and households. The 10-year yields spiked to the highest level since late 2023. Additionally, uncertainties surrounding President-elect Donald Trump’s potential approach to impose higher tariffs on China and other nations have heightened investor caution, particularly with the Jan. 20 inauguration just days away (read: Inverse Treasury ETFs Rallying on Spike in Yields).
Added to the chaos is the declining consumer sentiment to start the New Year, which signals concern on the inflation front. A University of Michigan survey showed consumer sentiment dropped to 73.2 in January from 74 in December.
With elevated and sticky inflation and rising bond yields, equity investors are starting to become more cautious and are currently seeking low-volatility ETFs.
Low Volatility ETFs in Focus
iShares MSCI USA Min Vol Factor ETF (USMV)
iShares MSCI USA Min Vol Factor ETF offers exposure to stocks that have lower volatility characteristics relative to the broader U.S. equity market by tracking the MSCI USA Minimum Volatility Index. It holds 182 stocks in its basket, with none accounting for more than 1.7% of the assets. Information technology takes the top spot at 26.9%, while financials, healthcare and consumer staples round off the next three spots.
With AUM of $24.3 billion, iShares MSCI USA Min Vol Factor ETF charges 15 bps in annual fees and trades in a solid average daily volume of 2 million shares. USMV has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
Invesco S&P 500 Low Volatility ETF (SPLV)
Invesco S&P 500 Low Volatility 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 102 securities in its basket. Invesco S&P 500 Low Volatility ETF is widely spread across sectors, with financials, utilities, industrials, consumer staples, and healthcare receiving double-digit exposure each.
Invesco S&P 500 Low Volatility ETF has amassed $7.2 billion in its asset base and trades in a solid volume of around 2 million shares a day on average. It charges 25 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)
Invesco S&P 500 High Dividend Low Volatility ETF offers exposure to 52 stocks traded on the S&P 500 Index that historically have provided high dividend yields and low volatility. It follows the S&P 500 Low Volatility High Dividend Index. Invesco S&P 500 High Dividend Low Volatility ETF is widely spread across sectors, with utilities, consumer staples, healthcare, real estate, and energy receiving double-digit exposure each.
Invesco S&P 500 High Dividend Low Volatility ETF has amassed $3.3 billion and charges 30 bps in annual fees. The fund trades in an average daily volume of 565,000 shares and has a Zacks ETF Rank #3 with a Medium risk outlook (read: 5 Top-Performing Dividend ETFs of 2H Yielding At Least 20%).
SPDR SSGA US Large Cap Low Volatility Index ETF (LGLV)
SPDR SSGA US Large Cap Low Volatility Index ETF follows the SSGA US Large Cap Low Volatility Index, which utilizes a rules-based process that seeks to increase exposure to stocks that exhibit low volatility. It holds 163 stocks in its basket, with key holdings in financials, industrials, real estate and utilities.
With AUM of $778.4 million, SPDR SSGA US Large Cap Low Volatility Index ETF charges 12 bps in annual fees and trades in an average daily volume of about 18,000 shares.
Invesco S&P SmallCap Low Volatility ETF (XSLV)
Invesco S&P SmallCap Low Volatility ETF offers exposure to small-cap securities from the S&P SmallCap 600 Index with the lowest realized volatility over the past 12 months. It follows the S&P SmallCap 600 Index and holds 120 stocks in its basket. Invesco S&P SmallCap Low Volatility ETF is also widely spread across sectors, with financials, real estate and industrials receiving double-digit exposure each (read: Can Small-Cap ETFs See the January Effect in 2025?).
Invesco S&P SmallCap Low Volatility ETF has amassed $295.6 million and trades in a volume of 11,000 shares per day on average. The product charges 25 bps in annual fees.
Bottom Line
These products could be worthwhile for low-risk-tolerance investors and have the potential to outperform the broader market, especially if volatility persists.
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