A Conservative Approach to ETFs

02/09/2016 9:00 am EST

Focus: ETFs

David Fabian

Managing Partner, FMD Capital Management

Given recent volatility, many investors are now turning to a strategy of capital preservation rather than swinging for the fences, observes David Fabian, editor of The Flexible Growth and Income Report, in a report for Nasdaq.com.

There are numerous ways to successfully reduce overall volatility and mitigate risk in a diversified ETF portfolio. 

The ideas mentioned below are for more conservative investors who are concerned about these transient periods of instability and wish to take a disciplined approach to reaching their long-term goals.

One approach is to focus on high growth and momentum stocks in favor of publicly-traded companies with a history of below-average volatility.

The iShares MSCI USA Minimum Volatility ETF (USMV) and PowerShares S&P 500 Low Volatility ETF (SPLV) are two examples of this conservative focus.

Both funds systematically select a subset of large-cap stocks with historical characteristics of minimal price fluctuations. 

In addition, both funds offer enough multi-sector diversification and fundamentally sound properties to be suitable as core holdings in a cyclical bull market as well. 

If building a well-balanced portfolio of stocks and bonds is overwhelming, it may be advantageous to look for a multi-asset solution that does it for you. 

The iShares Moderate Allocation ETF (AOM) is a fund of funds style ETF that invests in a mix of 40% stocks and 60% bonds. 

The goal is to create simplicity with a single investment vehicle that is automatically rebalanced on a regular basis.

This type of fund is suitable for investors that are looking for a conservative, diversified, and low-cost way to invest without the hassle of picking individual stocks or holdings.

In addition, the combination of stocks and bonds will help offset volatility and will likely reduce drawdown during periods of tumult in the market. 

Another similar multi-asset alternative with enhanced international and commodity focus is the Cambria Global Asset Allocation ETF (GAA).

This ETF takes a balanced approach with 51% bonds, 42% stocks, and 7% commodities as a result of the underlying low cost funds it holds. 

In addition, GAA has no management fee, which means that your only expense is the transaction fee to purchase it alongside the 0.29% expense pass through of the underlying holdings. 

This makes for an extremely reasonable way to own virtually every large asset class in the world in one fund.

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