You've probably heard that risk and return go hand in hand, that you have to take more risk to get better returns. But there are exceptions. Low volatility stocks are one of them. Historically, they have performed as well as the broad market with far less risk.
This article published with permission from InvestmentU.com.
As a financial writer, I am regularly inundated with friends and family members who ask two familiar questions.
The first is, “Where can I park my money these days to earn a decent yield without any downside risk?”
They don’t want to hear it, but I tell them the truth anyway.
“Nowhere. If you want yield, you have to take risk. And if you want a high yield, you have to take considerable risk.”
The second most frequently asked question is, “Is there a way I can invest in stocks without having to endure all that neck-snapping volatility?”
Here the answer is a bit more nuanced. There are things you can do to soften the curves in your equity portfolio, from running trailing stops to selling covered calls, ideas we’ve talked about here before.
But there is another alternative, one that even widows and orphans can embrace: low volatility stocks — and the ETFs that invest in them. Four low volatility stock funds to consider
Take the PowerShares S&P 500 Low Volatility Portfolio (Nasdaq: SPLV), for example. Since its inception a year ago, investors have plunked more than $1.6 billion into the fund. And they have been amply rewarded. Despite its somewhat stodgy portfolio — filled with names like Coca-Cola (NYSE: KO), Kellogg (NYSE: K) and Procter & Gamble (NYSE: PG) — the fund is up 9% year-to-date.
(I should warn here that funds like these do go down from time to time, just less than the broad market ordinarily.)
There are plenty of reasons to believe this will continue to be a good investment going forward. Plenty of academic and industry research confirms that safe, well-established companies provide generous returns to investors over the long term, without the sleepless nights. It seems counterintuitive, but low-risk, low-valuation, higher-yielding stocks have fared as well or better than go-go growth stocks over the long haul.
And today there are 14 different funds that bill themselves as low-beta investments. For example, the iShares MSCI Emerging Markets Minimum Volatility Index Fund (Nasdaq: EEMV) holds more conservative blue-chips in Latin America, Eastern Europe and Asia. It would be a good choice for a retirement account or a college fund for a child or grandchild with five or more years until matriculation.
If you are too conservative to invest in emerging markets — a mistake, in my view, given their attractive prospects — you might consider the Russell Developed ex-U.S. Low Volatility ETF (Nasdaq: XLVO). Or, if you want to invest globally but without a particular emphasis on emerging markets, consider the iShares MSCI All Country World Minimum Volatility Index (Nasdaq: ACWV).
Low risk, high return
You’ve heard the old investors’ saw that risk and return go hand in hand, that you have to take more risk to get better returns. But there are exceptions. Low volatility stocks are one of them. Historically, they have performed as well as the broad market with far less risk.
If you know someone who has a low stock allocation — or no stock allocation — because they were burned during the market meltdown of 2008 or during the sudden downdraft of last year’s third quarter, low-volatility ETFs are a good solution.
And when I find that special investment with a decent yield and no downside risk, I’ll let you know that, too.
But don’t hold your breath…
Alexander Green is the chief investment strategist at InvestmentU.com. See more articles by Alexander here.