Making Money Alert
ETF Talk: The Path of Least Volatility
08/24/2011
If you want to invest in the equity markets while economic uncertainty dominates the headlines, consider the PowerShares S&P 500 Low Volatility Portfolio (SPLV). And, if you read and watch market news as much as I do, you already know how grim the latest reports have been about slowing economic growth, falling housing prices and sagging consumer sentiment. Understandably, many observers are speculating that we could be heading into another recession in the United States and Europe. With these ominous conditions, equities typically do not perform well.
But SPLV offers a good, defensive play for wary investors. This ETF attempts to replicate the performance of the 100 lowest volatility stocks in the S&P 500 Index, before expenses and fees. So, while large swings in the market can cause lots of anxiety, the positions in the SPLV tend to move less than the overall market. The fund’s holdings generally are blue chip companies that are much less volatile than other stocks in the S&P 500 Index.
The highest weighted stocks in SPLV are those that have the lowest volatility. For example, the utilities and consumer staple sectors make up the majority of the SPLV, 32.80% and 22.94%, respectively. These sectors tend to outperform more volatile sectors such as technology or energy that do rather poorly in an uncertain marketplace.
The fund’s ten top holdings feature Southern Co., 1.54%; Consolidated Edison, 1.40%; Duke Energy, 1.33%; Proctor & Gamble Co., 1.32%; Progress Energy Inc., 1.32%; Wal-Mart Stores Inc., 1.31%; Xcel Energy Inc., 1.29%; Johnson & Johnson, 1.25%; Kimberly-Clark Corp., 1.24%; and H.J. Heinz Co, 1.23%. These stocks tend to perform well in down markets. They are companies in industries such as utilities and consumer staples that offer defensive places to invest your funds. Even when consumers spend cautiously, they still prioritize keeping their lights on, bathing and eating.
You may not have heard of SPLV previously, since it just launched on May 5, 2011. This is an ETF that could have performed well during the most recent recession had it been in existence then. It also could be a good addition to your portfolio now, if you believe that the defensive stocks held in SPLV are poised to outperform the market in the weeks and months ahead.
As always, if you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my ETF Trader service. I am happy to answer your questions, so do not hesitate to email me by clicking here. You just may see your question answered in a future ETF Talk.