As we move into a completely new fiscal year, thankfully have a huge uncertainty known as the 'fiscal cliff' behind us. However, it doesn't mean that the capital markets will be free from any other obstacle in the year, as political issues could be at the forefront once again in a few months thanks to the debt ceiling. Given that volatility could once again be on the rise as we head further into 2013, some investors may want to consider a lower risk play as this next event approaches. One easy way to do this is via ETFs which target low volatility stocks (read The Best Investing Style ETF This Fiscal?).

Of this group, there are a host of options out there. However, we believe that you can find one of the best in the group by looking to the Zacks ETF rank in order to find the top ranked ETF in the group which could be poised for a solid risk adjusted return in 2013.

About the Zacks ETF Rank

The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, region, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors.

ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also receive one of three risk ratings, namely Low, Medium, or High (see Time to Invest in Low Volatility ETFs?).

The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, the Zacks Rank reflects the expected return of an ETF relative to other products with a similar level of risk (see more in the Zacks ETF Center).

For investors seeking to apply this methodology to their portfolio, we have taken a closer look at the top ranked SPLV below:

Launched in May of 2011, the PowerShares S&P 500 Low Volatility ETF (SPLV) tracks the S&P 500 Low Volatility Index. The portfolio comprises of stocks from the entire universe of S&P 500 stocks that have exhibited lowest historic volatility over the last trailing twelve month period.

The ETF has been able to amass an asset base of more than $3 billion while around 1 million shares of SPLV exchange hands each day. Also, these low volatility stocks in the portfolio of the ETF are good dividend payers as indicated by a 12 month yield of 3%. SPLV can be considered relatively inexpensive as it charges only 25 basis points in fees and expenses (read Gold ETFs: Is the Sell-Off Overdone?).

Naturally, the ETF has a very low realized volatility as measured by an annualized standard deviation of just 13.76%, and just squeaking by with double digit returns. For the same time period, the S&P 500 has exhibited a volatility of around 20% and generated 13.41% as returns.

Although in terms of total returns SPLV seems to lag behind the S&P 500, however, on a risk adjusted basis the ETF has fared better than the broader index.

In terms of holdings, the ETF has a portfolio of 100 low volatility stocks across all sectors with 13% allocation towards the top 10 holdings. Not surprisingly, defensive sectors like Utilities (31%) and Consumer Staples (26.79%) account for the maximum share of its portfolio, with firms like Clorox (CLX), Southern Company (SO), and Kimberly Clark (KMB) taking the top three spots.

On the other side of the coin, potentially high risk-high return sectors like Financials and Information Technology account for just 10.5% and 3.5% of its portfolio, respectively, suggesting a low risk tilt even from a sector look (read SPDR Files for Low Volatility ETFs).

Presently, the ETF has a Zacks Rank of 1 or 'Strong Buy' with a 'Low' risk outlook, meaning it could be a solid pick for investors who have a low risk tolerance at this time.

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Tickers in this Article: SPLV, CLX, SO, KMB

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