Market Pulse: Money will go somewhere
In the worst markets people sell stocks and buy a money market fund. Most don’t stay there long.
Gold bugs say that the metal provides a haven when stocks turn south, but 2008 proved otherwise. In the current market money has moved from the more aggressive growth stocks like Apple, Amazon, Facebook, and Netflix to more conservative and consistent stocks like Merck, PepsiCo, and Hershey.
Is the strength of pharmaceuticals and consumer staples stocks because they are benefitting from a weak stock market or does it imply that Wall Street believes the economy will stall next year? That’s being debated.
Exchange-traded funds offer “low volatility” ETFs, making it easy for investors to purchase the slower moving safer stocks. What exactly are low volatility ETFs? They are equity funds that are designed to only hold stocks with below average volatility.
For example, the PowerShares S&P 500 Low Volatility Portfolio (SPLV) holds the 100 stocks in the S&P 500 that exhibited the lowest volatility over the previous year. It has an expense ratio of 0.25 percent, and its five largest stock holdings are Coca-Cola, Procter & Gamble, Duke Energy, Ecolab, and DTE Energy.
The most popular low volatility ETF is iShares Min Vol USA (USMV), which has an expense ratio of 0.15 percent. Whereas SPLV only holds S&P 500 stocks, USMV can also hold non-S&P 500 stocks. Its five largest holdings are McDonald’s, Visa, Pfizer, Johnson & Johnson, and Coca-Cola.
Just because the funds say “low volatility” doesn’t mean they are risk-free. They are equity funds and they’ll rise and fall with the overall stock market. They tend to overweight certain sectors (drug, telecoms, utilities, consumer staples), so they are less diversified.
One can also own these individual sectors by holding ETFs like iShares Pharmaceuticals (IHE) or iShares Telecommunications (IYZ). Many of my clients also own individual stocks like Pfizer and Verizon. Good thing, too.
The marketing department did well by calling these funds “low volatility.” This name helps investors feel comfort. In my view, however, these funds are similar to ETFs that emphasize dividend payments.
Low volatility funds and dividend funds typically hold the same securities because dividend paying companies usually exhibit lower volatility.
Low volatility ETFs are fairly new but over time I expect we’ll see a high correlation between these two categories.
Whether you buy low volatility or high dividend ETFs, you should do well in a bull market. That’s because money has to go somewhere and these funds allow nervous investors to reenter the stock market. They are good long-term holdings.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
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