With a 10-year bull market and continued uncertainty at home and abroad, some investors are beginning to worry about whether they should start to take their profits off the table. Generally speaking, this is a bad idea.
Research proves trying to time the market is a fool's errand and that investors who take a long-term view nearly always come out ahead. Still, staying hands off in a period of volatility is easier said than done.
If you feel a need to tinker with your holdings because you're worried about a downturn, consider these low-volatility exchange-traded funds.
These ETFs ensure you still participate in the market, but in a way that could see fewer bumps.
iShares Edge MSCI Min Vol USA ETF
This iShares ETF is the largest low-volatility offering on Wall Street, with almost $30 billion in assets under management and daily volume that regularly tops a few million shares. The strategy of USMV is simple but attractive: zero in on the top 200 or so U.S.-based corporations that illustrate less volatility when compared with their peers and the market as a whole. The result is a focus on staples stocks like Coca-Cola Co. (KO), but as of this writing USMV also boasts materials giant Newmont Goldcorp Corp. (NEM), because this firm has been a remarkably steady performer recently.
SPDR SSGA US Large Cap Low Volatility Index ETF
A similar strategy is offered by this SPDR fund, which is most concerned with the largest 100 or so U.S. corporations that exhibit less volatility than the market at large. That's a slightly smaller list of stocks, but regular rebalancing ensures no single position gets too large. At present, no individual stock represents more than 2% of the entire portfolio. Interestingly, LGLV is biased toward financials at present with more than a third of the fund in that sector. However, it's not banks that are making up this piece of the portfolio but rather insurance companies including Aflac (AFL) and Allstate Corp. (ALL).
iShares Edge MSCI Min Vol EAFE ETF
The U.S. doesn't have a monopoly on low-risk stocks, of course. And this iShares fund helps investors broaden the scope of their portfolio to include big-name corporations that are headquartered overseas but still exemplify rock-solid businesses. This tally includes Swiss consumer giant Nestle (NSRGY) and U.K. beverage firm Diageo (DEO), which manufactures Captain Morgan rum and Johnnie Walker whisky. These companies are just as safe as domestic staples stocks and worth a look for any low-risk portfolio.
JPMorgan Diversified Return International Equity ETF
Perhaps not as well-known as the iShares offering, this JPMorgan fund is a much larger and more sophisticated way to gain international exposure in a low-risk portfolio. JPIN has more than 400 holdings, none of which are worth more than 0.5%, and is comprised of many names you likely have never heard of such as Hong Kong-based power tool and appliance manufacturer Techtronic Industries Co. (TTNDY). The stocks range widely in geography and sector, sharing only a lower volatility profile based on JPMorgan's quantitative research. Owning an ETF that holds international stocks most investors wouldn't otherwise purchase is a great way to diversify and lower their risk profile.
Invesco S&P MidCap Low Volatility ETF
XMLV takes a similar approach as the previous funds, but it focuses on mid-sized corporations. This is a popular strategy for many investors looking to reduce their risk but still access growth potential, since mid-caps are theoretically "Goldilocks" investments that are not so big they have become stagnant and not so small they could be one bad headline away from bankruptcy. This ETF includes the $4 billion utility Hawaiian Electric Industries (HE) and mid-sized real estate investment trust PS Business Parks (PSB). These stocks are neither as popular nor as entrenched as mega-caps in the Dow Jones Industrial Average, but have safe business models – and a bit more agility.
Invesco S&P SmallCap Low Volatility ETF
If you're really interested in growth, small-cap stocks are the place to be. After all, a company like Apple (AAPL) that's already booking more than $250 billion in annual revenue faces the practical reality of large numbers when it plots growth plans, while an up-and-coming firm with just $250 million in revenue may be only one or two big deals away from a significant boost. These stocks carry a higher risk profile in general than larger stocks like Apple. But XSLV applies screening methods to choose the small caps that exhibit much lower degrees of volatility than their peers and offer a lower risk avenue to growth opportunities.
Legg Mason Low-Volatility High-Dividend ETF
Another mix of strategies that could appeal to investors worried about the prospect of a downturn would be to seek out significant dividends, either for the income potential or simply as a hedge against market declines, but also with the emphasis on low-volatility investments. That's what LVHD offers, by focusing on top dividend-paying stocks that have been stable and excluding companies that may offer a decent yield but have seen their shares get quite choppy as of late. Holdings of this ETF include mega-cap stocks like pharma giant Merck & Co. (MRK) and consumer giant PepsiCo (PEP).
JPMorgan Ultra-Short Income ETF
This JPMorgan fund is far less sophisticated than the prior funds, taking the idea that bonds are inherently more stable than stocks – and short-term bonds even more so. JPST doesn't simply sit in short-term U.S. Treasury bonds, however. While this rock-solid asset does make up a part of the portfolio, the ETF also invests in U.S. investment-grade corporate bonds from firms like banker Wells Fargo & Co. (WFC) as well as select emerging markets bonds. The result is a decent 2.5% yield at present – better than they typical S&P 500 dividend stock – with a heck of a lot less risk.
Pimco 1-5 Year U.S. TIPS Index Fund
A slightly different bond offering for low-risk investors is this Pimco fund, which focuses on the Treasury's inflation-protected securities, or TIPS. This is a special class of U.S. government that is indexed to inflation and will rise in principal value as the Consumer Price Index increases. The aim is to protect investors from rising prices that would offset any yield from TIPS. Keep in mind inflation is not as sure a thing as some investors fear and these instruments could lag if prices rise slowly. Still, for a diversified low-risk portfolio there is value in allocating some portion to TIPS to smooth out any volatility caused by inflation over the long term.