Minimum volatility ETFs

Concerned about the market? Min vol ETFs might be worth considering.

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Key takeaways

  • Minimum volatility ETFs (commonly referred to as "min vol" ETFs) attempt to reduce exposure to stock market volatility.
  • These funds track indexes that aim to provide lower-risk alternatives.
  • However, min vol ETFs do not ensure against losses.

Even though markets have been relatively calm, as measured by the CBOE Volatility Index (VIX), risk factors like global trade disputes, geopolitical friction, and other economic developments have the potential to move markets in either direction. If volatility strikes, you should know that there are volatility strategies that may help protect your portfolio. In addition to diversification, one investment choice that might be worth considering is a minimum volatility fund.

How to manage volatility

Diversification is a tried-and-true portfolio management technique. 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. Other investors may simply prefer to wait out market volatility—a buy-and-hold approach.

More active investors may want to consider other approaches. One such strategy is to implement tactical rebalancing. This is a dynamic asset allocation strategy that involves adjusting portfolio allocations to more or less risky investments, depending on how the market is performing and the expectations for volatility.

During periods of expected heightened market volatility, you may want to consider reducing exposure to riskier investments. Alternatively, when volatility is expected to be lower, the portfolio may be adjusted to include riskier investments that also align with your risk and return objectives.

Min vol

Another strategy that investors might consider is an exchange-traded fund (ETF) known as minimum volatility, or min vol. You might also see these types of investments referred to as low volatility ETFs.

A min vol ETF attempts to reduce exposure to volatility by tracking indices that aim to provide lower-risk alternatives. 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. Some min vol ETFs accomplish this objective by purchasing securities that exhibit relatively low volatility and concentration risk.* Of course, some min vol ETFs may not have lower concentration risk than broadly diversified market indexes.

Of course, a min vol ETF does not eliminate risk exposure to volatility, and may not prevent a loss in the event of a downturn. Low volatility funds may underperform 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 in the event of 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.

Additionally, 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. Many min vol investments are heterogeneous, with different exposures and upside/downside profiles.

Moreover, these types of funds might not only be considered in advance of a potential weak market. Many min vol ETFs tend to be skewed toward more defensive sectors, such as consumer staples and health care, and so they might perform well when those segments of the market are expected to do well—within the framework of the business cycle. Of course, the nature of how low vol funds are constructed can mean 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.

Minimum volatility ETFs

If you are concerned about a US stock market decline, you may want to consider researching min vol ETFs, the largest of which by net assets are iShares Edge MSCI Min Vol USA ETF (USMV), Invesco S&P 500® Low Volatility ETF (SPLV), and Invesco S&P 500® High Dividend Low Volatility ETF (SPHD). Fidelity offers purchases of USMV commission-free online.

If you have global investments and are concerned about some of the volatility risks that have emerged out of China, Europe, and other parts of the world, there are also non-US min vol ETFs. The largest non-US min vol ETFs by net assets are iShares Edge MSCI Min Vol EAFE (EFAV), iShares Edge MSCI Min Vol Emerging Markets ETF (EEMV), and iShares Edge MSCI Min Vol Global ETF (ACWV). Fidelity offers purchases of EFAV, EEMV, and ACWV commission-free online.

Other volatility management possibilities

There are several other ways that investors may be able to weather an increase in volatility. Bonds, for example, tend to be less volatile than stocks. When the stock market is expected to be more volatile, investors may want to consider increasing their bond allocation. It is worth noting that the bond market is not immune to volatility.

High-yielding stocks are another opportunity that investors can explore. The income component of high-yielding stocks tends to make these investments less volatile than more cyclical stocks, which have lower or no dividend yield. Of course, the 2008 financial crisis highlights that even this strategy may not be immune to severe market stress.

You could also consider select mutual funds that have historically exhibited lower volatility, relative to the broad market, as well as managed account solutions—particularly those with a defensive strategy.

Additionally, there are several options strategies, including straddles, strangles, and other spreads, which can be used to take advantage of expected market volatility.

Investing implications

Whether you take a more passive approach to managing your investments, or want to actively implement strategies that seek to reduce your exposure to market volatility, there are a number of ways to position your portfolio. Even though stocks recently set the record for the longest running bull market rally ever, it is never a bad time to consider positioning your portfolio for protection against volatility.

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Free commission offer applies to online purchases of select iShares ETFs in a Fidelity account. The sale of ETFs is subject to an activity assessment fee (from $0.01 to $0.03 per $1,000 of principal). 

ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than their NAV, and are not individually redeemed from the fund.

Options trading entails significant risk and is not appropriate for all investors. Certain complex options strategies carry additional risk. Before trading options, please read Characteristics and Risks of Standardized Options. Supporting documentation for any claims, if applicable, will be furnished upon request.

There is no guarantee that minimum volatility funds will attain a more conservative level of risk, especially during periods of extreme market conditions.

Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.

Neither diversification nor asset allocation ensures a profit or guarantees against loss.
For iShares ETFs, Fidelity receives compensation from the ETF sponsor and/or its affiliates in connection with an exclusive, long-term marketing program that includes promotion of iShares ETFs and inclusion of iShares funds in certain FBS platforms and investment programs. Additional information about the sources, amounts, and terms of compensation is described in the ETF’s prospectus and related documents. Fidelity may add or waive commissions on ETFs without prior notice. BlackRock and iShares are registered trademarks of BlackRock, Inc. and its affiliates.
There are additional costs associated with option strategies that call for multiple purchases and sales of options, such as spreads, straddles, and collars, as compared to a single option trade.
Exchange-traded products (ETPs) are subject to market volatility and the risks of their underlying securities, which may include the risks associated with investing in smaller companies, foreign securities, commodities, and fixed income investments. Foreign securities are subject to interest rate, currency-exchange rate, economic, and political risk, all of which are magnified in emerging markets. ETPs that target a small universe of securities, such as a specific region or market sector, are generally subject to greater market volatility as well as to the specific risks associated with that sector, region, or other focus. ETPs that use derivatives, leverage, or complex investment strategies are subject to additional risks. The return of an index ETP is usually different from that of the index it tracks because of fees, expenses, and tracking error. An ETP may trade at a premium or discount to its net asset value (NAV) (or indicative value in the case of exchange-traded notes). Each ETP has a unique risk profile that is detailed in its prospectus, offering circular, or similar material, which should be considered carefully when making investment decisions.
* Concentration risk can refer to heightened exposure to a particular asset class, investment characteristic, or other risk factor that results from a heavily weighted allocation.

All indexes are unmanaged, and performance of the indexes includes reinvestment of dividends and interest income, unless otherwise noted. Indexes are not illustrative of any particular investment, and it is not possible to invest directly in an index.

Past performance is no guarantee of future results.
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Before investing in any mutual fund or exchange-traded fund, you should consider its investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus, offering circular or, if available, a summary prospectus containing this information. Read it carefully.

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