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Fear of missing out on stock market gains is so last year. Fear of getting burned is the story of 2022 so far.

I’ve seen a marked increase lately in the number of readers asking questions about stock and bond market risk, about the potential impact of market volatility on retirement savings and about using guaranteed investment certificates. But as much as stocks have looked dangerous this year, most investors will still need to have some exposure to them in order to meet their financial goals.

A suggestion for staying in stocks while moderating the downside risk a little: Consider a low-volatility exchange-traded fund tracking the Canadian, U.S. or international markets. A recent report by CIBC Capital Markets said low volatility stocks have outperformed the market by 2 per cent to 10 per cent in major corrections over the past 10 years, while sacrificing some upside in bull markets.

“This balance of risk and reward can be very effective in ensuring investors remain invested in periods of equity weakness – such as the one we are currently experiencing,” the CIBC report said.

Low-volatility stocks move up and down less than the broader market, which means they have the potential to deliver less spiky returns over the years. The funds tracking them were popular several years ago, but got overlooked in the bull market that began after the crash in March, 2020.

Three low-volatility ETFs tracking the Canadian market were covered in the report – the BMO Low Volatility Canadian Equity ETF (ZLB-T), the Invesco S&P/TSX Composite Low Volatility Index ETF (TLV-T) and the iShares MSCI Min Vol Canada Index ETF (XMV-T). ZLB, the largest of this trio with assets of $2.7-billion, was singled out for its outperformance of the S&P/TSX Composite Index over the past 10 years.

ZLB’s 12.4-per-cent annualized return to April 30 compares with 8.5 per cent for the BMO S&P/TSX Capped Composite Index ETF (ZCN-T), which tracks the S&P/TSX Composite. ZCN has outperformed by a bit over the past two years, but ZLB protected investors better in the down years of 2018 and 2015. For the first four months of 2022, ZLB was up 1.1 per cent and ZCN was off 1.3 per cent.

One way in which low-vol ETFs differ is in how much they veer away from the sector weightings of the index, the CIBC report says. XMV, which was up 2.1 per cent for the year to April 30, is similar to the index, while ZLB differs significantly.

With the recent stock market gyrations in mind, the key finding of the CIBC report is that Canadian and U.S. market low-volatility ETFs have typically outperformed in corrections. Example: ZLB outperformed the market by 3 per cent in February and March, 2020, and XMV by 2 per cent. Low-vol ETFs won’t shield you from losses, but they can soften the blow.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 23/02/24 3:49pm EST.

SymbolName% changeLast
BMO Low Volatility CAD Equity ETF
Invesco SP TSX Low Vol Idx ETF
Ishares Edge MSCI Min Vol Can ETF
BMO S&P TSX Capped Comp ETF

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