Prime Time For Low Vol ETFs

Lower-volatility ETFs can boost returns in a slower growth environment.

Reviewed by: Gary Stringer
Edited by: Gary Stringer

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article features Gary Stringer, president and chief investment officer of Memphis, Tennessee-based Stringer Asset Management.

In our current macro outlook, we expect higher equity prices coupled with continued market volatility that is not necessarily associated with economic fundamentals. In this environment, adopting low-volatility equity ETFs may make a lot of sense.

Yes, recent volatility is unsettling, and we do expect to see slower economic growth than we experienced in 2018, but we don’t think an economic recession is likely in the near term.

The recent significant stock market volatility and the rate of price declines pushed equity prices close to levels typically seen during recessionary periods. But that level of volatility is a result of softening economic fundamentals plus a large dose of uncertainty due to political and trade war concerns, among other geopolitical issues. These latter concerns likely account for roughly half of the recent declines in market prices and the subsequent rally.

Growth Still Ahead

As long as our economic signals—such as positive money growth and a constructive business environment—remain in place, it is very probable that the U.S. economy will continue to grow (Exhibit 1).


Exhibit 1


Economic growth leads to higher corporate revenues and earnings, and that can support higher stock prices.

Furthermore, equities have an attractive return potential based on current valuations. For example, with last year’s market decline, the forward 12-month price-to-earnings ratio for the S&P 500 Index was at its lowest in several years (Exhibit 2). As a result, forward stock market returns can be significant.



Low-Vol ETF Angle

While we remain constructive on economic fundamentals, headline risks may persist. As a result, U.S. equity exposure with a lower-volatility twist makes a lot of sense. These types of investments can offer significant capital appreciation with much less risk than the overall equity market.

Some of the ETFs you can choose from include the iShares Edge MSCI Min Vol U.S.A. ETF (USMV), the SPDR SSGA U.S. Large Cap Low Volatility ETF (LGLV) and the Invesco S&P 500 Low Volatility ETF (SPLV).

USMV is the biggest of them, with $25 billion in assets and an average trading volume exceeding $212 million, according to data. The fund, which costs 0.15% in expense ratio, sets out to be a "minimum variance" portfolio taking into account correlation between stocks.

That’s a key difference between USMV and competing SPLV, which is a more straightforward low-vol portfolio, investing in the 100 least volatile S&P 500 stocks. SPLV has $10 billion in total assets, and costs 0.25% in expense ratio.

LGLV, meanwhile, is much smaller than the other two, with $323 million in total assets, but the fund is also the cheapest, with a 0.12% price tag. LGLV looks for the least volatile stocks in the Russell 1000.

At the time of writing, Stringer Asset Management held USMV among its universe of ETFs included in its suite of ETF Portfolios. Stringer Asset Management is a Memphis, Tennessee third-party investment manager and ETF strategist. Contact Stringer Asset Management at 901-800-2956 or at [email protected]. For a complete list of relevant disclosures, please click here.

Index Definitions:

The S&P 500 Index is a capitalization-weighted index of 500 stocks. The Index is designed to measure performance of a broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Gary Stringer is president and chief investment officer of Memphis, Tennessee-based Stringer Asser Management.