ETFs for Low-Risk Returns

12/31/2013 8:00 am EST


Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

Because the stock market has moved to a level of higher risk this month, I have selected several ultra-conservative defensive securities, says J. Royden Ward, editor of Cabot Benjamin Graham Value Investor.

iShares MSCI USA Minimum Volatility Index ETF (USMV) seeks investment results that correspond to the price and yield performance of the MSCI USA Minimum Volatility Index. The ETF invests at least 90% of its assets in securities of the Index or in depositary receipts, representing securities in the Index.

USMV shares sell very near to their net asset value. The price to earnings ratio (P/E) of the stocks contained in the ETF is 25.4, and the price to book value ratio (P/BV) is 5.76. Both ratios are a little high, but the beta, which measures volatility, is a low 0.94. Management fees total 0.15%.

USMV is very well-diversified, with risk spread out over 140 holdings. The largest position consumes only 1.57% of the total portfolio. The ten largest holdings, in order of size, are ADP, Merck, Wal-Mart, Paychex, Exxon Mobil, UPS, Johnson & Johnson, AT&T, McDonald's, and Verizon.

A recent report by Morningstar concluded: “in nearly every market studied, low-volatility stocks have outperformed high-volatility stocks.” USMV is a great addition to everyone's portfolio.

SPDR S&P Dividend ETF (SDY) holds all the companies in the S&P 1500 Index which have raised their dividends every year for the past 20 years. The objective of SDY is to include companies which have increased their dividends consistently. Only 85 qualify out of 1,500 companies!

Companies with pristine dividend records tend to produce solid earnings and sustainable business models. Also, management is less likely to engage in reckless capital spending if one of the goals of management is to protect and grow the company's dividend.

SDY shares sell very near to their net asset value. The P/E ratio, based on current EPS of the stocks contained in the ETF, is 18.4, and the P/BV ratio is 2.92. Both ratios are reasonable, and the beta is below average at 0.77. Management fees total 0.35%.

SDY is quite well-diversified with risk spread out over 85 holdings. The largest position consumes only 2.62% of the total portfolio.

The ten largest holdings, in order of size, are AT&T, HCP, Consolidated Edison, National Retail Properties, AbbVie, Clorox, Kimberly-Clark, Sysco, Chevron, and McDonald's.

The five largest sectors are Consumer Staples, Financials, Industrials, Materials, and Utilities. SDY is a great substitute for bonds, because of its 2.4% yield and steady performance.

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