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What are we looking for?

Low volatility exchange-traded funds to augment your portfolio.

The screen

Though stock investors have had some great trading sessions over the past couple of months, this year overall has been a tough go for the conservative investor. Unless an investor had the foresight to overweight energy and basic materials sectors (unlikely given the historical volatility of the underlying commodity prices), it’s very likely investors have been disappointed with their portfolio results and moreover are increasingly concerned about market volatility.

With this in mind, I turn my attention this week to the world of low volatility ETFs. As a reminder, these are a type of “smart beta” product that utilize systematic investment approaches that grant investors exposure to a specific type of factor (value, growth, momentum, low volatility, etc.) often at fraction of the management fee charged by an active manager. Low volatility ETFs in particular tend to overweight companies that historically have had lower sensitivity to market movements.

To find some ideas in this space to consider for your equity portfolio, I used Morningstar Direct to look amongst the 1,300-plus ETFs from Canadian fund manufacturers for low volatility ETFs that have outperformed their respective category peers. To do this, I used the Morningstar Rating for Funds, also known as the “star” rating. Recall that this rating is an objective look back at fund performance by comparing historical risk-adjusted returns after fees against the category to which the fund belongs, noting that fund categories include both active and passive mutual funds and ETFs. It’s worthwhile to note that on aggregate, five-star funds outperform four-star funds, which outperform three-star funds, etc., in periods after receiving a rating. In today’s screen, I looked for four- and five-star low volatility ETFs.

What we found

11 low volatility ETFs

FundTickerMorningstar CategoryMER (%)Morningstar Rating OverallYTD Ttl. Rtn. (%)1Y Ttl. Rtn. (%)3Y Ann. Ttl. Rtn. (%)5Y Ann. Ttl. Rtn. (%)10Y Ann. Ttl. Rtn. (%)Incept. DateCdn. Equity (%)U.S. Equity (%)Int'l Equity (%)Cash (%) Other (%)
BMO Low Volatility Canadian Equity ETFZLB-TCanadian Equity0.395 Stars-
iShares MSCI Min Vol Canada ETFXMV-TCanadian Equity0.334 Stars-3.6-
Invesco S&P Emerging Mkts. Low Vol ETFELV-TEmerging Mkts. Eqty.0.345 Stars-5.2-
iShares MSCI Min Vol Emerg Mkts ETFXMM-TEmerging Mkts. Eqty.0.424 Stars-12.4-10.3-2.0-0.13.72012-07-
Mackenzie Max. Divers Emerg Mkts ETFMEE-TEmerging Mkts. Eqty.0.564 Stars-17.1-14.9-1.3-0.5n/a2017-01-230.00.599.00.50.0
CI MSCI EurLRWgtETF CommRWE-TEuropean Equity0.654 Stars-16.3-11.9-1.12.5n/a2014-02-
iShares MSCI Min Vol Global ETFXMW-TGlobal Equity0.484 Stars-7.2-
iShares MSCI Min Vol EAFE ETF CADHXML-TInt'l Equity0.374 Stars-9.1-7.9-1.11.8n/a2016-04-050.00.997.71.20.0
BMO Low Volatility US Equity ETF (CAD)ZLU-TU.S. Equity0.335 Stars5.916.010.111.8n/a2013-03-
iShares MSCI Min Vol USA ETFXMU-TU.S. Equity0.334 Stars-
Fidelity US Low Volatility ETFFCUL-TU.S. Equity0.384 Stars-

Source: Morningstar Direct; performance data as of Nov. 1

The ETFs that met the above requirements are listed in the accompanying table, alongside their management expense ratios, star rating, trailing performance, and inception dates, and are sorted by the Morningstar category. Investors are urged to first look at the category to which each fund belongs, to determine whether the geographic exposure of each fund makes sense for your overall asset allocation.

This article does not constitute financial advice. Investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.

Ian Tam, CFA, is director of investment research for Morningstar Canada.

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