After a double-digit drop for stocks last year, the market has been on a roll thus far this year. But many investors and economists think that a potential recession may be waiting just up the road.
If you are also concerned about the direction of stocks, minimum volatility ETFs are an opportunity worth considering if you want to reduce your exposure to short-term volatility while staying invested.
While neither diversification nor asset allocation ensures a profit or guarantees against a loss, both can be effective ways to manage long-term fluctuations in the market. If you are diversified, you might simply prefer to wait out any expected market volatility.
Some investors prefer more tactical approaches. During periods of expected heightened market volatility, you may be thinking about reducing your exposure to riskier positions. If volatility is subsequently expected to be lower, you can get back into positions you would invest in under normal market conditions that also align with your risk and return objectives. It can go without saying that this requires a commitment of time and a level of skill that most individual investors may not have.
Another strategy to consider to reduce exposure to volatility is a min vol exchange-traded fund (ETF).
Min vol ETFs in focus
A min vol ETF (as well as other min vol investment vehicles) attempts to reduce exposure to volatility by tracking indexes that aim to provide lower-risk alternatives to other riskier investments. For example, a min vol ETF might exhibit less risk during market turbulence compared with a broadly diversified index such as the S&P 500. You might also see these types of investments referred to as low volatility ETFs.
There are other investment vehicles that attempt to mitigate exposure to volatility, including minimum volatility mutual funds and low volatility managed accounts. Many min vol investments are heterogeneous (i.e., they have different exposures and upside/downside profiles). Min vol strategies come in a variety of forms, including single asset class, multi-asset class, long-only, long/short, risk parity, and downside managed.
A min vol ETF does not eliminate risk exposure to volatility. Min vol funds may underperform non-min vol funds with similar asset class exposures when the broad market is doing well, and they can experience declines during sharp corrections. However, the expectation for a min vol ETF investor is that any potential losses during a market decline might be smaller relative to other investments that may have more exposure to volatility. As a result, a less risky portfolio could recover more quickly than the broad market after a downturn when stocks recover.
Some characteristics that an investor might use to evaluate a min vol ETF include risk and return measures like R-squared, beta, standard deviation, upside/downside capture ratio, and historical performance. You can find some of these on Fidelity.com when you select a particular ETF.
Fidelity minimum volatility offerings
Fidelity offers 2 min vol funds: Fidelity® Low Volatility Factor ETF (
Min vol ETF opportunities
Min vol ETFs can be used to lower overall portfolio risk. For instance, if your portfolio consists largely of cyclical stocks, a min vol ETF might diversify away some risk exposure in the event that the market becomes volatile. If you want to reduce your exposure to volatility if, for example, you think there may be an increase in short-term volatility, and you like the benefits of ETFs, a min vol ETF could be right for you.
Of course, investors who rely too heavily on them could end up with portfolios that are concentrated in large-cap defensive stocks and light on small-cap growth stocks.
With that said, and assuming you like to make tactical adjustments to your investments (and you are comfortable with the long-term risk/return characteristics of your asset mix), min vol investment choices may help you execute your strategy if you are concerned about a short-term market decline. If you want to explore min vol ETFs, here are the 10 largest by net assets according to Fidelity.com data, as of August 10, 2023:
- iShares MSCI Min Vol USA ETF (
- JPMorgan Ultra-Short Income ETF (
- Invesco S&P 500 Low Volatility ETF (
- iShares MSCI Min Vol EAFE ETF (
- iShares MSCI Min Vol Global ETF (
- iShares MSCI Emerging Markets Min Vol Factor ETF (
- Invesco S&P 500 High Dividend Low Volatility ETF (
- Janus Henderson Short Duration Income ETF (
- Franklin US Low Volatility High Dividend Index ETF (
- SPDR MSCI USA StrategicFactors ETF (