Trendy investment products are 95-per-cent junk designed to generate sales rather than fill a true portfolio need.
Starring in that 5-per-cent segment of trendy investments that do fill a hole is the low volatility ETF. If you owned one of these in the past three years particularly the BMO Low Volatility Canadian Equity ETF (ZLB), the ugliness of the past three years in the Canadian stock market hardly happened. You made money while investors who focused on the S&P/TSX composite and other indexes sank into the red.
There will be time, and it may already be here, when it's time to pivot out of low volatility ETFs and back into mainstream index-tracking ETFs. As the S&P/TSX composite perked up in late February, traditional Canadian equity ETFs outperformed. But for times when the Canadian market is weak and giving up ground, low volatility ETFs have proven themselves.
Low volatility ETFs typically use a screening process focusing on large stocks that fluctuate the least in price. Theoretically, this would limit both up and downside. But given that we've seen a lot more down than up in the past three years, the low volatility approach has been ideal.
ZLB lost just 0.6 per cent for the 12 months to Feb. 29, while the BMO S&P/TSX Capped Composite Index ETF (ZCN) fell 12.9 per cent. The three average annual return for ZLB was huge – 15.7 per cent. ZCN made 3.1 per cent. Other low volatility products did well, too. The PowerShares S&P/TSX Composite Low Volatility Index ETF (TLV) averaged 8.1 per cent for the three years to Feb. 29, while the PowerShares FTSE RAFI Canadian Fundamental Index ETF (PXC) made just 1.4 per cent. PXC lost 13.6 per cent over the past 12 months, while TLV dipped 3 per cent.
A couple of other low volatility ETFs are the iShares MSCI Canada Minimum Volatility Index ETF (XMV), down 5.6 per cent in the past 12 months and up 7.3 per cent annually in the past three years, and the First Asset MSCI Canada Low Risk Weighted ETF (RWC), down 8.6 per cent in the past 12 months (it doesn't have a three-year record yet).
The market weakness of the past three years has been an ideal environment for the low volatility ETF. They'll stay gold as until Canadian stocks break out of their long slump.
Rob Carrick