Excitement can be fun in many aspects of life, but when it comes to the stock market it is often better to opt for a more tame strategy. If you chose to be the tortoise this past year you would have been the winner, as far as performance. A handful of ETFs concentrate on stocks that are considered low volatility and offer steady, above-average dividends. (For related reading, see Exchange-Traded Funds: Introduction.)
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PowerShares S&P 500 Low Volatility ETF (ARCA:SPLV) is composed of the 100 stocks from the S&P 500 Index that have the lowest realized volatility over the prior 12 months. The ETF is currently heavily weighted in utilities (approx 32%), consumer staples (approx 30%) and health care (approx 12%). Over three-fourths of the stocks in the ETF fall into the value asset class and two-thirds are large caps.
Several of the stocks in the top 10 are at or near all-time highs, as money continues to make its way into sectors that investors perceive as "less risky." From utility Southern Company (NYSE:SO) to Kraft Foods (NYSE:KFT), the allocation of low volatility stocks has been the big winner this year.
SPLV began trading in early May and this week broke through to the best level in the short history of the ETF. The ETF is up around 4.6% since May 5, 2011, as the SPDR S&P 500 ETF (ARCA:SPY) has lost around 8% over the same period. This approximate 12% outperformance is a major difference in such a short period of time. (To learn more, read The Benefits Of ETF Investing.)
The expense ratio is a low 0.25% and the SEC 30-day yield is around 3.1%. The P/E ratio on the ETF is about 14, surprisingly above the S&P 500; the price-to-book is 1.96. Regardless of the valuation, SPLV should continue to make investors happy and less stressed in this high volatility environment.
The iShares High Dividend Equity Fund (ARCA:HDV) began trading on the last day of March and has a comparable chart pattern to SPLV. The ETF has a bit of a different strategy, but the allocation is similar in makeup. The process starts with nearly every publicly traded U.S. stock before they are broken down into quality income paying stocks. From there, the top 75 yielding stocks are chosen to make up the ETF.
The top three sectors are health care (approx 28%), consumer goods (approx 24%) and telecommunications (approx 17%). The top three stocks are AT&T (NYSE:T), Pfizer (NYSE:PFE) and Johnson & Johnson (NYSE:JNJ). The 75 stocks in the ETF have a P/E ratio of around 15.5 and a price-to-book of about 4.1. The expense ratio is 0.4% and the 30-day SEC yield is approximately 3.76%. Since May 5, 2011, HDV is up around 5%, besting both SPLV and SPY. (For more information, read The P/E Ratio: A Good Market-Timing Indicator.)
Low volatility and emerging markets may sound like an odd couple, but it is possible and the EGShares Low Volatility Emerging Market Dividend ETF (ARCA:HILO) brings it to reality. The ETF tracks a dividend yield weighted stock market index that is designed to provide higher yields and lower volatility than the MSCI Emerging Market Index.
The ETF charges a net expense ratio of 0.85% and the current index dividend yield is about 6.7%. There are a total of 29 stocks with the largest concentration in South Africa (approx 16%), China (approx 15%), Thailand (approx 14%) and Brazil (approx 12%). Due to the high yields in the sector, telecom stocks make up around 27% of the allocation with electricity at about 13%.
Since its inception on Aug. 4, 2011, the ETF is down about 5.4%, versus a drop of around 15% for the iShares MSCI Emerging Markets ETF (NYSE:EEM) over the same time period.
The Bottom Line
I rarely will suggest an investor put all his/her eggs in one basket and this is one case where that will not change. Over allocating to the low volatility and high dividend ETFs is an acceptable strategy, but keep in mind that if the market rallies, the above-mentioned ETFs will likely lag. That being said a sustained sell-off should see them outperform the overall market. (For related reading, see Exchange-Traded Funds: Equity ETFs.)
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At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.