How You Can Ratchet Down Risk With These Popular ETFs

Through May 13, the S&P 500 was sporting a month-to-date loss of around 4 percent. A loss like that in such a small time frame often prompts investors to assess defensive strategies.

Exchange traded funds offer investors plenty of avenues for getting defensive, whether it be at the sector level or via broader market funds.

What Happened

Some of investors' favorite ETF destinations when volatility rises are low volatility funds, such as the iShares Edge MSCI Min Vol USA ETF USMV and the Invesco S&P Low Volatility ETF SPLV. With the seasonally weak period of the year for stocks here, investors may increasingly gravitate to funds such as SPLV and USMV.

“The relatively weak performance for the S&P 500 thus far in May is consistent with historical trends,” said CFRA Research's Director of ETF & Mutual Fund Research Todd Rosenbluth in a recent note . “According to Sam Stovall, Chief Investment Strategist at CFRA, the May-October period has been the weakest of the six months of the calendar, with the S&P 500 posting an average gain of only 1.4% since 1946.”

Why It's Important

Broadly speaking, stocks were faltering this month, but SPLV and USMV met their primary objective, which is to perform less poorly than the broader market when stocks decline. While the S&P 500 was down 4 percent as of May 15, SPLV and USMV were lower by 0.70 percent and 1.60 percent, respectively.

Investors “could use lower volatility ETFs, which tend to have higher relative weightings in defensive sectors,” said Rosenbluth. “However, it is important to look inside since they are not constructed the same and they are heavily reconstituted throughout the year, unlike the market-cap weighted S&P 500 Index.”

SPLV's relative durability can be traced to its significant weights to defensive sectors. As of May 14, the Invesco ETF allocated a combined 44.73 percent of its weight to the defensive utilities and real estate sectors. USMV devotes nearly 17 percent of its weight to utilities and real estate stocks.

What's Next

USMV has some cyclical exposure with a combined weight of over 26 percent to technology and consumer discretionary stocks, indicating SPLV might be the way to go over the near-term for highly conservative investors. CFRA has Overweight ratings on both ETFs. Over the past year, investors have added $2.30 billion to SPLV, making the fund the top asset gatherer among all Invesco ETFs over that period.

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Posted In: CFRA ResearchTodd RosenbluthAnalyst ColorLong IdeasBroad U.S. Equity ETFsTrading IdeasETFs

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