Low Risk, Low Volatility ETFs

02/01/2016 9:00 am EST

Focus: ETFs

Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

For investors concerned about market volatility, value investing expert J. Royden Ward, editor of Cabot Benjamin Graham Value Investor, highlights two favorite ETFs known for low risk and low volatility.

iShares MSCI USA Minimum Volatility ETF (USMV) is an ETF that invests in large, stable companies with low stock price volatility.

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 at very near net asset value. The price-to-current earnings ratio of the stocks contained in the ETF is 22.7 and the price-to-book value ratio is 3.11.

Both ratios are a little high, but the beta, which measures volatility, is a low 0.68. Management fees total 0.15%.

USMV is very well diversified with risk spread out over 169 holdings. The largest position consumes only 1.62% of the total portfolio.

The five largest sectors are Financials, Healthcare, Information Technology, Consumer Staples, and Consumer Discretionary.

USMV’s rose 3.31% in 2015 compared to a decline of 0.73% for the S&P 500 Index (SPX). It also provides an attractive dividend yield of 2.2%. Low volatility will provide portfolio stability during a volatile stock market.

Also rated very low risk, SPDR S&P Dividend ETF (SDY) holds all the companies in the S&P 1500 Index that 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 99 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.

The ETF’s dividends and distributions paid in 2015 exceeded the prior year by 22.1% and now provide a generous dividend yield of 2.7%.

SDY is in good position to rebound in 2016 and outperform stock market indexes. Its largest sectors are Financials, Industrials, Consumer Staples, Utilities, and Materials.

SDY is a great substitute for bonds because of its increasing dividends and steady performance. Steady dividend increases will also reduce downside risk. Management fees total 0.35%, which is low.

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