CHICAGO (Reuters) – During the financial market turbulence of recent years, fund marketers have launched a number of stock funds that boasted exceptionally low volatility. They were the equivalent of sea-sickness pills for those who still wanted to go on stock-market cruises.
Yet these exchange-traded funds (ETFs) make less sense when the stock market is bullish. You may sacrifice returns and could dampen volatility more effectively with other strategies. In a sustained bull market – if you want to be invested in stocks at all – you would be much better off in a broad-based, all-in index fund than a low-volatility ETF.
To be sure, as risk-reduction vehicles, low-volatility ETFs play it safer by investing in mature companies with steady cash flows and solid dividends. They are less likely to be sold off in a market rout such as the one experienced last year.
For example, ETFs such as the PowerShares S&P 500 Low-Volatility Portfolio focus on long-established dividend payers in consumer products and utilities. Their overall approach is to lower the risk in stock market investing by lowering the volatility.
LAGGING THIS YEAR
This strategy may have softened the swells from the stormy markets of last year, but it’s coming up a laggard this year as a recovering economy is propelling the general market.