Stocks went into a deep plunge in December. Then they staged a strong rally in January and February. But March has started off on the downside again.
Fed up with all the volatility? There is a way to smooth out these wild swings. Many companies are now offering low-volatility exchange-traded funds (ETFs) and mutual funds that are specifically designed to minimize the effect of market turbulence.
They have different names: low-volatility, minimum-volatility, low-risk. But they all have the same mandate – a portfolio consisting of stocks with a history of price movements that are less than those of the broad market. In theory, these low-volatility stocks should be less risky and, based on the research I have done, that does generally seem to be the case.
There are many of these funds available, with wide geographic coverage. Here’s one that stood out in my research.
BMO Low Volatility Canadian Equity ETF (ZLB)
Type: Exchange-traded fund
Trading symbol: ZLB
Current price (March 8): $31.80
Annual payout: 80 cents
The security: Unlike most ETFs, this does not track the performance of a specific index. Instead, the managers invest in a portfolio of low-beta-rated Canadian stocks. Beta is a measure of a stock’s sensitivity to broad market movements. The lower the beta, the less sensitive a stock is to big up-and-down swings, and thus to unusually large gains or losses.
Performance: The five-year average annual compounded rate of return to Feb. 28 was 11 per cent. That was despite a loss of 2.8 per cent in 2018. Note that the TSX was down more than 11 per cent that year, so this fund lived up to its low-risk mandate.
Why I like it: Low-volatility stocks tend to reduce the risk in a portfolio. That does not mean they won’t ever lose money, only that they usually won’t decline as much as the overall market. On top of the reduced risk, this fund offers a reasonable cash flow.
Portfolio: The fund is well-diversified, with 46 positions. Only three have weightings of more than 3 per cent; Fairfax Financial (4.03 per cent), Emera (3.38 per cent) and Intact Financial (3.25 per cent). In sector terms, financials dominate at just over 22 per cent.
Key metrics: The fund was launched in October, 2011, and has assets under management of $1.27-billion. The management expense ratio is 0.39 per cent, which is about midway between a plain-vanilla broad index ETF and a sector fund.
Risks: Low-volatility does not mean zero risk – only reduced risk. If the stock market drops dramatically, this fund will lose ground, just not as much. Conversely, when stocks rise, funds such as this will tend to lag.
Distribution policy: Payments are made quarterly and have recently been running at 20 cents per unit (80 cents per year). In addition, there may be a year-end reinvested distribution.
Tax implications: Most of the distributions are taxed as either capital gains or eligible dividends.
Who it’s for: This ETF is suitable for investors who are looking for a lower-risk way to invest in stocks and only need modest cash flow.
How to buy: The units trade on the TSX.
Summing up: The track record shows that this ETF has lived up to its mandate, delivering good five-year returns while minimizing losses in 2018.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.