Contributor, Benzinga
March 27, 2023

Low volatility exchange-traded funds (ETFs) invest in stocks with lower volatility than the broader market. These funds are designed to provide investors with exposure to stocks that are less risky than the overall market while still offering the potential for long-term growth.

How Do Low Volatility ETFs Work?

Low volatility ETFs typically invest in stocks that have exhibited lower volatility over time, as measured by factors such as beta or standard deviation. These funds may also use other factors, such as quality or momentum, to identify stocks with lower volatility.

By investing in lower volatility stocks, low volatility ETFs seek to provide investors with a smoother ride than the broader market. During market downturns, these funds may hold up better than the overall market, potentially reducing losses for investors. However, during periods of market strength, these funds may not perform as well as their higher volatility counterparts.

What Are the Benefits of Low Volatility ETFs?

One of the main benefits of low volatility ETFs is their potential to reduce risk in a portfolio. By investing in stocks with lower volatility, these funds may be less vulnerable to sharp market swings, potentially reducing losses for investors during market downturns.

Low volatility ETFs may also offer investors an alternative to traditional defensive investments, such as bonds or cash. While these investments may provide downside protection, they may not offer the same potential for long-term growth as equities. Low volatility ETFs can provide a middle ground, offering investors exposure to equities with lower volatility.

What Are the Drawbacks of Low Volatility ETFs?

One potential drawback of low volatility ETFs is that they may underperform during periods of market strength. These funds may not capture the full upside potential of the overall market, which could impact long-term returns for investors.

Additionally, some low volatility ETFs may be concentrated in certain sectors or industries, which could impact diversification. It is important for investors to consider the underlying holdings of these funds and ensure that they align with their investment objectives and risk tolerance.

Header 5: How to Choose the Best Low Volatility ETFs?

When selecting low volatility ETFs, investors should consider several factors, including:

  • Expense ratio: Low volatility ETFs with lower expense ratios may be more attractive for investors, as they can provide cost savings over the long term.
  • Holdings: Investors should review the underlying holdings of low volatility ETFs and ensure that they are diversified and aligned with their investment objectives.
  • Performance: While past performance is not indicative of future results, investors may wish to consider how low volatility ETFs have performed in different market environments.
  • Liquidity: Investors should consider the liquidity of low volatility ETFs, as this can impact trading costs and execution.

Final Thoughts on Low Volatility ETFs

Low volatility ETFs can provide investors with exposure to stocks with lower volatility, potentially reducing risk in a portfolio. These funds may offer an alternative to traditional defensive investments, while still providing potential for long-term growth. However, investors should consider the benefits and drawbacks of low volatility ETFs, and select funds that align with their investment objectives and risk tolerance.

Frequently Asked Questions


What is a low volatility ETF?


A low volatility ETF invests in stocks that exhibit low volatility or risk compared to the overall market. These ETFs typically invest in stocks of companies with stable earnings, lower debt levels and less volatile price movements.


How are low volatility ETFs different from other ETFs?


Low volatility ETFs are different from other ETFs in that they focus on stocks with low volatility or risk. Other types of ETFs, such as growth or value ETFs, may focus on other factors such as earnings growth or dividend yield.


Are low volatility ETFs a good investment for conservative investors?


Low volatility ETFs may be a good investment for conservative investors who are seeking lower risk and volatility in their portfolios. However, it’s important to note that no investment is completely risk-free and that low volatility ETFs may still experience fluctuations in value.