The Professionals and Cons of Funds That Mute the Ups and Downs

The Invesco S & P 500 ETF with low volatility holds the 100 index constituents with the lowest volatility in the last 12 months and adjusts the portfolio quarterly. IShares Edge MSCI Minimum Volatility USA uses a more complex formula that selects the least volatile stocks in each market sector. However, these funds have had a noticeable deficit recently. Low volatility stocks are less volatile, but no law says they must go up if the index does.

That was not the case last year as market gains were mainly driven by oversized returns in technology stocks. While investors were excited about Apple, Amazon, Microsoft, and the like, they avoided stocks with low volatility. The Invesco ETF lost 3.6 percent, compared to a 21.7 percent increase for the Invesco S&P 500 High-Beta, the ETF that holds the 100 stocks in the index with the highest sensitivity to market movements. The low volatility iShares fund rose 3.5 percent.

Since the Invesco funds were launched in 2011, the low volatility portfolio increased 121.3 percent and the high beta portfolio increased 132.6 percent as of December 31. The bad news for the owners of both funds is that the S&P 500 SPDR, the ETF that only tracks the broad index, is up 177.2 percent over the period.

“I want to know what insurance I have,” said Christopher Cordaro, chief investment officer of RegentAtlantic, a financial planning firm in Morristown, New Jersey, criticizing the low volatility funds that were “creamed” last year.

He believes that a better way to guard against excessive volatility in stocks is to own high quality bonds alongside them in a conventionally diversified portfolio.

“You are much better off managing risk if you are exposed to the stock markets and fixed income,” he said. “The best shock absorber is Treasuries.”

To get the most out of a stock and bond portfolio, he recommends regularly selling whatever has gone up and buying whatever has stayed with the proceeds.

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