With the recent government shut-down and debt ceiling limit quickly approaching, the market has once again begun it’s up and down movements. Adding in slowing growth in key emerging markets like China and debt problems in Europe once again beginning to resurface and it’s no wonder why volatility has returned with a vengeance. Funds that attempt to track this “fear” - such as the iPath S&P 500 VIX ST Futures ETN (NYSE:VXX) –have spiked in recent weeks, while the broad market indexes have gone down.

Given the recent volatility of the market, investors could be getting a little seasick. Luckily, there are a variety of new ways for the average retail investor to "smooth out" their ride over the short term.

Minimizing The Roller Coaster Ride

The term volatility gets used a lot by financial journalists and bloggers, but many investors don't really understand the basic concepts behind it. Essentially, volatility refers to the amount of uncertainty or risk about the size of changes in a security's value. In other words, the price of the security can change dramatically over a short time period in either direction. It's the difference between riding a roller coaster and driving across the plains of Kansas. While there is nothing inherently wrong with high volatility stocks, these movements can create panic selling and many restless nights.

And it seems that investors have been having more restless nights as of late.

Over the past two weeks -as the shutdown has commenced and other pieces of global economic data have struggled. The CBOE S&P 500 Volatility Index has surged almost 25%. Meanwhile, the broad market Vanguard S&P 500 ETF (NYSE:VOO) has dropped around 1.76% in only five days. That’s certainly creating some very restless nights for those approaching retirement. Enter low volatility funds.

These funds essentially use screens to kick out high volatility stocks and capture the upside of the market while limiting the downside as well as the “bounciness” associated with markets movements. They also can produce better returns as well. According to index provider MSCI (NASDAQ:MSCI), replacing its standard indexes in a balanced portfolio of U.S., Developed market international and emerging markets with its low volatility versions will produce an extra 1.8% in returns. Meanwhile volatility was cut nearly in half. 

A Low Volatility Portfolio

Historically, funds like the Utilities Select Sector SPDR (NYSE:XLU) have been low beta options for investors. However, Wall Street has begun rolling out new products that target this sector of market place. Here are a few portfolio ideas.

With nearly $4.28 billion in assets, the PowerShares S&P 500 Low Volatility (NASDAQ:SPLV) is the king in the space. The fund tracks 100 stocks in the benchmark S&P 500 that have exhibited the lowest volatility over the last 12 months. Top holdings include Kellogg’s (NYSE:K) and utility Dominion Resources (NYSE:D). That focus on limiting the markets bumps has worked well. Since the fund’s inception in 2011, SPLV has managed to outperform the S&P 500 by 1.25%. Not to be out done, the iShares MSCI USA Minimum Volatility (NASDAQ:USMV) similar index and is heavily weighted in consumer staples, healthcare and information technology companies. The SPDR Russell 2000 Low Volatility ETF (NASDAQ:SMLV) can be used to cut volatility in the small-cap portion of a portfolio. 

Some of the largest bouts of volatility have come from the international space. Already, higher “risk” stocks, these two market segments tend to move around much more than their U.S. counterparts. The iShares MSCI EAFE Minimum Volatility (NASDAQ:EFAV) can be used as a broad developed market proxy, while emerging market investors have an interesting choice in the EGShares Low Volatility Emerging Markets Dividend ETF (NASDAQ:HILO). The fund is composed of 30 low volatility stocks from various emerging markets and is designed to provide a high yield, but with a lower volatility than the MSCI Emerging Markets Index. The ETF currently yields a juicy 4.87%. 

The Bottom Line

The recent government shutdown, potential debt ceiling breach as well as dour global economic news has once again caused volatility to rear its ugly head. Those market swings can cause for some rough nights of sleep for investors. However, a new crop of low volatility funds could be the best ways to smooth out the market’s bumpy ride. 

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.


Related Articles
  1. 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.
  2. Investing Basics

    10 Habits Of Successful Real Estate Investors

    Enjoying long-term success in real estate investing requires certain habits. Here are 10 that effective real estate investors share.
  3. Investing Basics

    5 Types of REITs And How To Invest In Them

    Real estate investment trusts are historically one of the best-performing asset classes around. There are many types of REITs available.
  4. Investing Basics

    5 Simple Ways To Invest In Real Estate

    There are many ways to invest in real estate. Here are five of the most popular.
  5. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  6. Products and Investments

    A Guide to DIY Portfolio Management

    These are some of the pillars needed to build a DIY portfolio.
  7. Fundamental Analysis

    Is Brazil Currently in a Depression?

    Find out if Brazil, the world's seventh-largest economy, may have finally slipped into an economic depression, and learn the reasons why.
  8. Mutual Funds & ETFs

    The 4 Best Vanguard Funds for Growth Investors in 2016

    Discover four mutual funds managed by the Vanguard Group that would be attractive for investors interested in investing in growth stocks in 2016.
  9. Investing Basics

    Building My Portfolio with BlackRock ETFs and Mutual Funds (ITOT, IXUS)

    Find out how to construct the ideal investment portfolio utilizing BlackRock's tools, resources and its popular low-cost exchange-traded funds (ETFs).
  10. Stock Analysis

    3 Reasons to Invest in Frontier Markets in 2016

    Learn why investing in frontier markets will be a great long-term investment as these markets grow in ways that will propel them to success in the future.
  1. Is Malaysia a developed country?

    Despite undergoing rapid economic development over the past five decades, Malaysia is not considered a developed country, ... Read Full Answer >>
  2. 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 >>
  3. Can hedge fund returns be replicated?

    You can replicate hedge fund returns to a degree but not perfectly. Most replication strategies underperform hedge funds ... Read Full Answer >>
  4. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  5. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  6. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
Trading Center