Not all investors got hammered during the S&P 500's sell-off since July 16. Those owning risk-fighting ETFs pulled in big gains while everyone else suffered.
Five so-called low-volatility funds, including Franklin U.S. Low Volatility High Dividend ETF, Invesco S&P 500 High Dividend Low Volatility ETF and iShares MSCI USA Minimum Volatility Factor ETF, were among the top dozen returning U.S. diversified ETFs in the past month, says Morningstar Direct.
These ETFs bet big on defensive stocks in sectors like consumer staples and utilities and lightened up on communications services and information technology, says Todd Rosenbluth, director of research at Vetta Fi. And those have been the best places to be as the S&P 500 sold off the past month. The S&P 500 posted a negative return of 3.1% in the past month.
"Lower or minimum volatility ETFs held up better during the past month as they focus on the stocks that have historically moved the least in the recent past," Rosenbluth said. "These differences were rewarding in the past month as the defensive sectors held up better amid concerns about the global economy."
How Low Volatility ETFs Stand Apart From S&P 500
The $596 billion-in-assets Franklin U.S. Low Volatility High Dividend highlights the power of the low-risk approach.
The fund returned 5.23% in the past month. That made it the No. 1 returning U.S. diversified ETF in that time. How did it do it? The fund doubled down on exactly the kinds of stocks that were working while the Magnificent Seven sputtered.
The ETF put its largest position, 25%, into utilities stocks. This sector accounts for a tiny 2% stake in the S&P 500 in contrast. And that has paid off handsomely lately. Utilities stocks are more stable and pay higher dividends than the S&P 500. But they're also benefitting from a jump in demand from power-hungry AI firms.
Take utility Southern, one of the ETF's largest positions. It's up roughly 10% in just a month. And that doesn't even include its 3.3% dividend yield. Additionally, these ETFs are reconstituted periodically to make sure volatile stocks haven't crept in, Rosenbluth says.
Other Options For Low Volatility
Franklin's ETF, though, is far from the only low volatility choice.
Rosenbluth points out the $7.2 billion-in-assets Invesco S&P 500 Low Volatility fund. This fund follows the least risky 100 stocks in the S&P 500 no matter which sector they are in. On the other hand, iShares MSCI USA Min Vol Factor ETF picks the least risky stocks in each sector. "Relative to (Invesco S&P 500 Low Volatility) iShares MSCI USA Min Vol usually has more exposure to information technology and less exposure to utilities (though more than the broader market)," he said.
Yet other low-volatility ETFs tap other factors. Fidelity Low Volatility Factor ETF "is different in that it is built based on price and earnings volatility. It also takes a sector neutral approach," Rosenbluth said. And Invesco S&P 500 High Dividend Low Volatility factors in high dividend yields in addition to low volatility.
But one thing is clear. These lower risk ETFs can really pay off when the higher octane parts of your portfolio are struggling.
"Lower volatility ETFs offer a lower-risk way to have direct equity exposure," Rosenbluth said. "They can serve as the core of risk-averse equity investors' (portfolios) or can be used to reduce the risk profile by pairing with a broad market ETF."
Top Performing Low-Volatility ETFs This Month
Total returns in the past month
| Name | Ticker | Market return YTD | Market return one-month | Net assets ($ millions) |
|---|---|---|---|---|
| Franklin U.S. Low Volatility Hi Div | LVHD | 7.72% | 5.23% | $595.8 |
| Invesco S&P 500 High Div Low Vol | SPHD | 14.86 | 4.73 | 3,358.8 |
| Invesco S&P 500 Low Volatility | SPLV | 9.85 | 2.63 | 7,175.8 |
| iShares MSCI USA Min Vol Factor | USMV | 12.93 | 2.05 | 24,538.2 |
| iShares MSCI USA Sm-Cp Min Vol Fctr | SMMV | 9.52 | 1.89 | 318.6 |
| S&P 500 | 14.89 | -3.14 |
