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Low Volatility ETFs Shining Halfway Through Q3

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After a strong first half, Wall Street lost momentum at the start of the third quarter, triggered by recession worries and overvaluation concerns in the tech sector, which was investors’ darling and led the market higher this year. This has resulted in higher demand for low-volatility products, with several ETFs outperforming the broader market halfway through the third quarter.

We have highlighted five ETFs from the space that have outpaced the S&P 500, which lost 4.1% in a month. These are Invesco S&P 500 High Dividend Low Volatility ETF (SPHD - Free Report) , SPDR SSGA US Large Cap Low Volatility Index ETF (LGLV - Free Report) , Invesco S&P 500 Low Volatility ETF (SPLV - Free Report) , iShares MSCI USA Min Vol Factor ETF (USMV - Free Report) and Invesco S&P MidCap Low Volatility ETF (XMLV - Free Report) .

Low-volatility ETFs have the potential to outpace the broader market in bearish conditions or 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 (read: Market Anxiety? Protect Your Portfolio with Zero-Loss ETFs).

Low-Volatility in Trend

Traders are betting that the U.S. economy has lost steam and is on the verge of sliding toward a recession, given rising unemployment, high interest rates and fading confidence in the tech sector.

The labor market cooled in July as the economy added 114,000 jobs, 35% fewer than expected. Unemployment rose from 4.1% to 4.3%, the highest since October 2021, and represented the fourth consecutive monthly increase. The data prompted concerns about a recession. Another batch of data from the Institute for Supply Management indicates slowdown worries. Manufacturing activity fell in July, marking the fourth straight month of contraction.

Additionally, concerns that big technology companies’ shares, particularly those investing heavily in artificial intelligence (AI), have been overvalued led to massive sell-offs in early August. Further, geopolitical tensions and the looming November elections also made investors jittery.

Per the CME Fedwatch Tool, the majority of traders now expect the Fed to pursue a 50 bps interest rate cut next month. Lower interest rates generally lead to reduced borrowing costs, which help businesses expand their operations more easily, resulting in increased profitability. This, in turn, stimulates economic growth and provides a boost to the stock market (read: Rate Cut in the Cards? ETFs to Play). 

Given the prospect of rate cuts and heightened volatility, investors are currently seeking low-volatility ETFs.

ETFs in Focus

Invesco S&P 500 High Dividend Low Volatility ETF (SPHD - Free Report) – Up 4.7%

Invesco S&P 500 High Dividend Low Volatility ETF offers exposure to 51 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, real estate and healthcare 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 509,000 shares and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: 5 Dividend ETFs Crushing the Market).

SPDR SSGA US Large Cap Low Volatility Index ETF (LGLV - Free Report) – Up 3.1%

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 162 stocks in its basket, with key holdings in financials, industrials, real estate and utilities. 

With AUM of $738.8 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 20,000 shares.

Invesco S&P 500 Low Volatility ETF (SPLV - Free Report) – Up 2.6%

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, consumer staples, industrials, and utilities 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 1.4 million shares a day on average. It charges 25 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook.

iShares MSCI USA Min Vol Factor ETF (USMV - Free Report) – Up 2%

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 170 stocks in its basket, with none accounting for more than 1.7% of the assets. Information technology takes the top spot at 24.8%, while healthcare, financials, 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 #3 with a Medium risk outlook.

Invesco S&P MidCap Low Volatility ETF (XMLV - Free Report) – Up 2%

Invesco S&P MidCap Low Volatility ETF offers exposure to the mid-cap securities from the S&P MidCap 400 Index with the lowest-realized volatility over the past 12 months. It follows the S&P MidCap 400 Low Volatility Index and holds 81 securities in its basket. Invesco S&P MidCap Low Volatility ETF is widely spread across sectors, with financials, real estate, industrials, and utilities receiving double-digit exposure each.

Invesco S&P MidCap Low Volatility ETF has AUM of $808.4 million and charges 25 bps in annual fees. XMLV trades in an average daily volume of about 50,000 shares.

Bottom Line

These products could be worthwhile for low-risk-tolerance investors and have more potential to outperform the broad market, especially if market volatility persists.

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