The economy has slowed down and many economists predict continued sluggish growth for a considerable amount of time. There has also been mention of a double dip recession and how the European crisis may push the entire global economy into a dire situation. This has caused quite a bit of volatility as news has caused rapid spikes and drops in the market.

As an investor looking at a long time horizon, you may wonder when the right time to invest in the stock market is (if you haven't invested already) or whether to get out of the market until the economic environment has more clarity. The problem with this strategy is that it is very difficult to accurately time the market and many studies have shown that if an investor misses the beginning of a bull market, their long-term returns will be sub-par. So the key is to stay in the market and manage risk by adjusting your exposures. But how?

Well, there are several mutual funds and ETFs that have much lower volatility than other funds within the same asset class. The majority of these mutual funds are in the alternative space. But in the ETF world, there are several ETFs that can be great ways for investors to participate in the stock market and still be able to sleep at night.

SEE: Volatility's Impact On Market Returns

The Easily Repeatable
The PowerShares S&P 500 Low Volatility Portfolio ETF (SPLV) is based on the S&P 500 Low Volatility Index. It is probably the easiest low volatility index to explain and if an investor really wanted to, they could also duplicate it. Basically, the S&P Low Vol index measures the standard deviation of the 500 companies in the Standard & Poor's 500 Index for the preceding 12 months. It then ranks all 500 companies from lowest standard deviation (lowest volatility) to highest standard deviation (highest volatility). It then assigns a pro-rated share to each stock, based on its standard deviation versus the standard deviation of other stocks; the highest weighted stock is the one with the lowest standard deviation.

The result is that the index typically has only 70% of the volatility of the S&P 500. That means, for every 1% drop in the S&P 500, the S&P Low Volatility index will tend to decline by 0.7%. However, the same may hold true for bull markets. In fact, in a very strong bull market, the S&P Low Vol Index will underperform. In addition to the lower volatility, however, the stocks in the index tend to have attractive yields, which as of June 29, 2012, was 2.87%.

By looking at the underlying sectors, we also notice that there tends to be concentrations in the consumer staples, utilities and healthcare sectors. This makes sense, since these sectors tend to be more defensive in nature and, hence, less volatile.

SEE: How To Reduce Volatility In Your Portfolio

The Sophisticated Methodology
Investors can also choose to invest in the iShares MSCI Minimum Volatility Index Fund (USMV), which is based on the MSCI Minimum Volatility Index. This index is constructed using a much more sophisticated optimization process designed to minimize the absolute risk of the index, within a certain set of constraints. These constraints may include replicability, investability, turnover, and minimums and maximums for each stock, sector and country. In many cases, it will not include those stocks with the least volatility, but rather, it strives to create the combination of stocks that together will have the least amount of absolute risk. Needless to say, it would be very hard to explain this to grandma, much less replicate it yourself.

The Dynamic Approach
In addition to these two funds, Direxion offers a fund that is called the Direxion S&P 500 DRRC Index Volatility Response Shares (VSPY). Unlike the other ETFs, this fund has a set target volatility of 15% and is dynamically adjusted to try to achieve that level of risk. It adjusts its exposure to equities based on the volatility of the S&P 500, increasing exposure to equities when the volatility on the S&P is low and decreasing it when the volatility on the S&P is high.

SEE: How To Pick The Best ETF

The Bottom Line
Any one of these funds can be a good alternative for an investor to participate in the equity markets without the burden of dealing with volatility. As summarized above, they each use very different strategies to achieve the goal of lower volatility. It is, therefore, up to each individual investor to determine on his or her own or with an advisor, whether they prefer a simple approach that is easily repeatable (such as SPLV), a more sophisticated methodology (as in that offered by USMV), a more dynamic approach (such as the VSPY), or any combination of the three.

Related Articles
  1. Economics

    India: Why it Might Pay to Be Bullish Right Now

    Many investors are bullish on India for all the right reasons. Does it present an investing opportunity?
  2. Investing

    Retirees: 7 Lessons from 2008 for the Next Crisis

    When the last big market crisis hit, many retirees ran to the sidelines. Next time, there are better ways to manage your portfolio.
  3. Products and Investments

    There's a Reason They're Called Junk Bonds

    The closing of Third Avenue Managemet's Focused Credit Fund is a warning to investors and advisors. Beware the junk.
  4. Mutual Funds & ETFs

    Top 3 PIMCO Funds for Retirement Diversification in 2016

    Explore analyses of the top three PIMCO funds for 2016 and learn how these funds can be used to create a diversified retirement portfolio.
  5. Mutual Funds & ETFs

    The 3 Best Downside Protection Equity Mutual Funds

    Learn how it is possible to profit in a bear market by owning the correct selection of mutual funds that provide downside protection and opportunity.
  6. Economics

    Industries That Thrive On Recession

    Recessions are not equally hard on everyone. In fact, there are some industries that even flourish amid the adversity.
  7. Mutual Funds & ETFs

    The 4 Best Lord Abbett Mutual Funds

    Discover the four best mutual funds administered and managed by Lord, Abbett & Co., LLC that offer investors a wide variety of investment strategies.
  8. Mutual Funds & ETFs

    The ABCs of Mutual Fund Classes

    There are three main mutual fund classes, and each charges fees in a different way.
  9. Investing Basics

    5 Common Mistakes Young Investors Make

    Missteps are common whenever you’re learning something new. But in investing, missteps can have serious financial consequences.
  10. Mutual Funds & ETFs

    The 3 Best Vanguard Funds for Value Investors in 2016

    Find out which of Vanguard's value funds are the best for building a solid core-satellite value investing strategy for your portfolio.
RELATED FAQS
  1. Are target-date retirement funds good investments?

    The main benefit of target-date retirement funds is convenience. If you really don't want to bother with your retirement ... Read Full Answer >>
  2. Do mutual funds require a demat account?

    A dematerialized account enables electronic transfer of funds. The account is used so an investor does not need to hold the ... Read Full Answer >>
  3. How liquid are Vanguard mutual funds?

    The Vanguard mutual fund family is one of the largest and most well-recognized fund family in the financial industry. Its ... Read Full Answer >>
  4. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  5. Does OptionsHouse have mutual funds?

    OptionsHouse has access to some mutual funds, but it depends on the fund in which the investor is looking to buy shares. ... Read Full Answer >>
  6. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
Hot Definitions
  1. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  2. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  3. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  4. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  5. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center