Navigate the September Swoon With These Low Volatility ETFs

The U.S. stock market started September on a dismal note as weak data raised fresh concerns about the economy's health. The weak trend is likely to continue, given that September is one of the market's historically worst months, resulting in higher demand for low-volatility products.

We have highlighted five ETFs from the space that are popular and could be solid options for investors in the current choppy market. These are iShares MSCI USA Min Vol Factor ETF USMV, Invesco S&P 500 Low Volatility ETF SPLV, Invesco S&P 500 High Dividend Low Volatility ETF SPHD, Invesco S&P MidCap Low Volatility ETF XMLV and Invesco S&P SmallCap Low Volatility ETF XSLV.

Low-volatility ETFs have the potential to outpace the broader market in bearish conditions or in an uncertain environment, providing significant protection to the portfolio. This is because these funds include more stable stocks that have experienced the least price movement in their portfolio. Further, these allocate more to defensive sectors that usually have a higher distribution yield than the broader markets.

Current Market Trend

Private employers in the United States posted their smallest monthly hiring growth since January 2021, per ADP data. Job openings dropped to the lowest level since January 2021 in July, indicating that the labor market is losing steam. This week’s ISM manufacturing survey also came in weaker. All these paint a downbeat picture of the economy.

September is the only calendar month to average a negative return over the past 98 years, per Fisher Investments. According to Ryan Detrick, chief market strategist at advisory firm Carson Group, September has been the market’s worst-performing month since 1950. 

The declines are due to a seasonal phenomenon, as investors are more prone to selling than buying when they return from their summer vacations. Also, trading volume after Labor Day is mostly bearish, many mutual funds have fiscal years ending Sep 30, window-dressing is rampant, and investors generally sell stocks to pay tuition bills for their kids’ private schools and colleges.

Further, concerns that big technology companies’ shares, particularly those investing heavily in artificial intelligence (AI), have been overvalued continued to weigh. Further, geopolitical tensions and the looming November elections are also making investors jittery.

Though the economy is slowing, the soft data makes the case for deeper rate cuts. Traders are now pricing in a nearly 50% chance of the Federal Reserve slashing interest rates by 50 bps by the end of its September meeting, up from a 38% chance the day prior, per the CME FedWatch Tool (read: Sector ETFs Set to Explode as Fed Rate Cut Bets Gain Steam).

Lower interest rates generally lead to reduced borrowing costs, which help businesses expand their operations more easily, resulting in increased profitability. This, in turn, stimulates economic growth and provides a boost to the stock market.

Given the prospect of rate cuts and historically weak trends, investors are currently seeking low-volatility ETFs.

Low Volatility ETFs in Focus

iShares MSCI USA Min Vol Factor ETF (USMV)

iShares MSCI USA Min Vol Factor ETF offers exposure to stocks that have historically declined less than the market during downturns by tracking the MSCI USA Minimum Volatility Index. It holds 170 stocks in its basket, with none accounting for more than 1.7% of the assets. Information technology takes the top spot at 24.7%, while financials, healthcare, and consumer staples round off the next three spots.

With AUM of $25.3 billion, iShares MSCI USA Min Vol Factor ETF charges 15 bps in annual fees and trades in a solid average daily volume of 2 million shares. USMV has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: 5 ETF Strategies to Survive a Historically Weak September).

Invesco S&P 500 Low Volatility ETF (SPLV)

Invesco S&P 500 Low Volatility ETF provides exposure to stocks with the lowest realized volatility over the past 12 months. It tracks the S&P 500 Low Volatility Index and holds 101 securities in its basket. Invesco S&P 500 Low Volatility ETF is widely spread across sectors, with financials, consumer staples, industrials, utilities, and healthcare receiving double-digit exposure each.

Invesco S&P 500 Low Volatility ETF has amassed $7.5 billion in its asset base and trades in a solid volume of around 2 million shares a day on average. It charges 25 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook.

Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)

Invesco S&P 500 High Dividend Low Volatility ETF offers exposure to 51 stocks traded on the S&P 500 Index that historically have provided high dividend yields and low volatility. It follows the S&P 500 Low Volatility High Dividend Index. Invesco S&P 500 High Dividend Low Volatility ETF is widely spread across sectors, with utilities, consumer staples, real estate, and healthcare receiving double-digit exposure each.

Invesco S&P 500 High Dividend Low Volatility ETF has amassed $3.8 billion and charges 30 bps in annual fees. The fund trades in an average daily volume of 584,000 shares (read: Low Volatility ETFs Shining Halfway Through Q3).

Invesco S&P MidCap Low Volatility ETF (XMLV)

Invesco S&P MidCap Low Volatility ETF offers exposure to the mid-cap securities from the S&P MidCap 400 Index with the lowest-realized volatility over the past 12 months. It follows the S&P MidCap 400 Low Volatility Index and holds 82 securities in its basket. Invesco S&P MidCap Low Volatility ETF is widely spread across sectors, with financials, industrials, real estate and utilities receiving double-digit exposure each.

Invesco S&P MidCap Low Volatility ETF has AUM of $839.5 million and charges 25 bps in annual fees. XMLV trades in an average daily volume of about 42,000 shares.

Invesco S&P SmallCap Low Volatility ETF (XSLV)

Invesco S&P SmallCap Low Volatility ETF offers exposure to small-cap securities from the S&P SmallCap 600 Index with the lowest realized volatility over the past 12 months. It follows the S&P SmallCap 600 Index and holds 82 stocks in its basket. Invesco S&P SmallCap Low Volatility ETF is also widely spread across sectors, with financials, industrials, real estate and utilities receiving double-digit exposure each.

Invesco S&P SmallCap Low Volatility ETF has amassed $342.5 million and trades in a volume of 26,000 shares per day on average. The product charges 25 bps in annual fees.

Bottom Line

These products could be worthwhile for low-risk-tolerance investors and have the potential to outperform the broader market, especially if volatility persists.

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