Thus far, 2019 has been a year of moderate volatility when compared to the previous year. Despite the rampant news headlines, filled with trade war tensions, looming interest rate cuts, oil explosions, and war jitters with Iran, the markets have rallied steadily throughout the year, and volatility, as measured by the VIX, has remained on average in the 13-16 range, where it currently resides.
Per Investopedia, “The Volatility Index, or VIX, is an index created by the Chicago Board Options Exchange (CBOE), which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options. This volatility is meant to be forward looking, is calculated from both calls and puts, and is a widely used measure of market risk. The VIX is often referred to as the ‘investor fear gauge.’”
In a more general sense though, volatility is simply a measure of unpredictability; it is the likelihood that things will stray from the norm.
For stocks, measures of volatility typically refer to how certain equities perform over a longer period of time. Investors who are uneasy with increased stock market volatility might consider stocks with a history of consistent month-to-month performance. Interestingly, the low volatility aberration is the finding that low volatility stocks often generate loftier returns over the long run than stocks with wider price swings. Greater risk does not necessarily mean greater reward in this case.
iShares Edge MSCI Min Vol USA ETF (USMV)
For those investors seeking a way to put together a low volatility portfolio of stocks, the iShares Edge MSCI Min Vol USA ETF (USMV) is worth examining. USMV seeks to track the investment results of an index composed of U.S. equities that, in the aggregate, have lower volatility characteristics relative to the broader U.S. equity market. The fund offers would-be investors exposure to U.S. stocks with potentially less risk. Historically, USMV has declined less than the market during market downturns, and investors can consider USMV for a core position in a portfolio.
The who’s who of stocks that make up USMV’s holdings include an assortment of household names such as Coca-Cola, Visa, McDonald’s, Pepsico, Verizon, Pfizer, and Yum Brands, among others.
Based on data since May 31, 1988, the MSCI USA Minimum Volatility Index, the index which USMV seeks to model, has outperformed the S&P 500 by an average of 30 basis points per year, including reinvested dividends, according to analysis from Ned Davis Research presented by The Hulbert Financial Digest.
Cyclics Vs Defensives ETF Plays
For investors looking for continued upside in U.S. cyclical sectors over defensive sectors, the Direxion MSCI Cyclicals Over Defensives ETF (NYSEArca: RWCD) offers them the ability to benefit not only from cyclical sectors potentially performing well, but from their outperformance compared to defensive sectors.
Conversely, if investors believe that U.S. defensive sectors will outperform cyclical sectors, the Direxion MSCI Defensives Over Cyclicals ETF (NYSEArca: RWDC) provides a means to not only see defensive sectors perform well, but a way to capitalize on their outperformance compared to cyclical sectors.
For more investing ideas, visit ETFtrends.com.
