The Invesco S&P 500 Low Volatility E.T.F. holds the 100 index constituents with the lowest volatility over the previous 12 months, adjusting the portfolio quarterly. IShares Edge MSCI Minimum Volatility U.S.A. uses a more complex formula, picking the least volatile stocks in each market sector.But these funds have a shortcoming that has been noticeable lately. Low-volatility stocks suffer milder swings, but no law says they have to rise when the index does.
Last year, they didn’t, as market gains were driven primarily by outsize returns in technology stocks. While investors were infatuated with Apple, Amazon, Microsoft and the like, they shunned low-volatility stocks. The Invesco E.T.F. lost 3.6 percent, compared to a 21.7 percent gain for Invesco S&P 500 High-Beta, the E.T.F. that holds the index’s 100 stocks with the highest sensitivity to market moves. The iShares low-volatility fund rose 3.5 percent.
Since the Invesco funds were introduced in 2011, the low-volatility portfolio was up 121.3 percent through Dec. 31, and the high-beta portfolio gained 132.6 percent. The bad news for owners of both funds is that S&P 500 SPDR, the E.T.F. that simply tracks the broad index, rose 177.2 percent over that span.
“I want to know the insurance I have works,” said Christopher Cordaro, chief investment officer of RegentAtlantic, a Morristown, N.J., financial-planning firm, criticizing the low-volatility funds that “got creamed” last year.
A better way to guard against excessive volatility in stocks, in his view, is to own high-quality bonds alongside them in a conventional diversified portfolio.
“You’re much better off governing risk by having stock market exposure and fixed income,” he said. “The best shock absorber is Treasuries.”
To get the most from a stock-and-bond portfolio, he recommends periodically selling whatever has gone up and buying whatever has lagged with the proceeds.