ETFs have become the most prominent investment vehicle globally over the past two decades due to their simplicity, low cost, and stellar returns. As the popularity of the ETF grew, many niches in the space have developed. As a result, many types of ETFs are available today other than the standard index tracking ones, such as technology or sector-focused ETFs, leveraged ETFs, and low volatility ETFs. Low Volatility ETFs are an excellent proposition for serious long-term investors due to lower risk exposure and lower correlation of holdings. These ETFs deserve an allocation in every investor’s portfolio as they will hold the ship steady in tough times.
Low Volatility ETFs are focused on risk mitigation. These ETFs primarily hold stocks from core non-discretionary sectors such as food, electricity, oil, clothing, pharmaceutical, other utilities, etc. These companies typically have unbreachable competitive advantages such as Coca-Cola in the food sector, government regulation protection in utilities, or valuable intellectual property such as patents to important drugs owned by pharmaceutical companies.
A host of historical data usually determines the stocks to be held by the ETF and their weights. The most typical qualities that a low volatility stock possesses are low standard deviation, which measures the deviation of a stock from its long-term average, and correlation, which measures the sensitivity of the stock to the broader market and other stocks in the ETF portfolio. These metrics are compiled from the stock’s metrics and performance over long periods. A critical assumption made when selecting low volatility stocks is that past performance will repeat itself in the future. Thus, the ideal scenario is low standard deviation and low correlation.
The Best Low Volatility ETFs in Canada
Financial services companies or fund managers use these metrics and others to derive strategies that have a very defensive risk-return profile. Each low volatility ETF has its strategy methodology that is detailed in the fund’s prospectus. Low Volatility ETFs are typically more expensive than traditional index-tracking ETFs because of the complexity of their strategies.
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BMO Low Volatility Canadian Equity ETF
- AUM – C$2.89 Billion
- Expense Ratio – 0.39%
- Number of Holdings – 47
- 5 Year Performance – 58.10%
- 1 Year Performance – 28.10%
- 5 Biggest Sectors – Financials, Consumer Staples, Utilities, Communications, and Industrials.
The BMO Low Volatility Canadian Equity ETF was the first ETF to be launched in Canada. Since 2011, the ETF has been a stellar performer with 12.9% annualized returns, compared to 8.1% for the market, along with lower volatility.
Strategy – The BMO Low Volatility ETF employs a low beta strategy. The universe of securities available to the ETF is the large-cap space of the TSX. The fund cannot hold more than 5% in any stock and 35% in any sector. The stocks in the ETF are determined by the beta of a stock, which is its correlation to the broader market. The ETF uses beta as its primary determinant because it usually stays stable over time. Based on a stock’s beta over multiple timeframes ranging from 1 to 5 years, a score is attributed to the stock, determining its weight in the ETF portfolio. The ETF rebalances every six months and is reconstituted every December.
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iShares MSCI Min Vol Canada Index ETF
- AUM – $123 Million
- Expense Ratio – 0.33%
- Number of Holdings – 60
- 5 Year Performance – 47.87%
- 1 Year Performance – 25.45%
- 5 Biggest Sectors – Industrials, Information Technology, Consumer Staples, Financials and Materials
The iShares MSCI Min Vol Canada Index ETF is operated by financial services major BlackRock. Since its inception, the ETF has done its job of delivering low volatility returns extremely well as it has captured 82.5% of the TSX Composite’s returns while only having captured 71% of the downside.
Strategy – The iShare ETF takes a very different and more complex approach to BMO in terms of strategy. Instead of just using a stock’s beta, the iShares ETF uses a stock’s standard price deviation in conjunction with the stock’s correlation to other stocks in the ETFs portfolio. After determining a list of low standard deviation stocks, the ETF managers find the stocks with the lowest correlation amongst each other. The final list is then weighted by sector and bought by the ETF. This helps the investor lower risk even further below an already low volatility universe of stocks to choose from. The ETF is rebalanced every six months.
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Invesco S&P/TSX Composite Low Volatility Index ETF
- AUM – C$323 million
- Expense Ratio – 0.32%
- Number of Holdings – 50
- 5 Year Performance – 40.1%
- 1 Year Performance – 21.08%
- 5 Biggest Sectors – Financials, Industrials, Energy, Technology, and Basic Materials
The Invesco S&P/TSX Composite Low Volatility Index ETF is the second-largest low volatility ETF in Canada. Since its inception in 2012, the ETF has returned 120% compared to the TSX Composite’s 72%.
Strategy – The Invesco ETF uses a more simplified version of the iShares strategy. Instead of using historical standard deviation with intra-portfolio correlation, the Invesco ETF uses only standard deviation. The ETF holds about one stock for every five stocks in the TSX, chosen based on the lowest standard deviation over the past year. Unlike BMO and iShares that are rebalanced every six months, Invesco’s ETF is completely rebuilt every quarter. However, Invesco suggests that this ETF be used with other investments to hedge downside risk and not be held alone.
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Fidelity Canadian Low Volatility Index ETF
- AUM – C$16.8 million
- Expense Ratio – 0.4%
- Number of Holdings – 60
- 1 Year Performance – 26.3%
- 5 Biggest Sectors – Financials, Industrials, Utilities, Communications, and Real Estate
The Fidelity Canadian Low Volatility Index ETF is the second-smallest low volatility ETF in Canada as it is much newer than its peers, having been launched in January 2019. It has also lagged the TSX Composite by a mammoth 30% since its inception.
The Fidelity ETF follows a different strategy from all its peers by considering a stock’s earnings. As a result, the company finds stocks with the lowest 1-year price volatility along with stable earnings.
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TD Q Canadian Low Volatility ETF
- AUM – C$7.58 million
- Expense Ratio – 0.3%
- Number of Holdings – 42
- 1 Year Performance – 23.8%
- 5 Biggest Sectors – Utilities, Financial Services, Communications, Consumer Staples and Industrials
The TD Q Canadian Low Volatility ETF is the newest and smallest ETF of its kind in Canada. Having been launched in February of 2020, the ETF has the lowest AUM of its peers and met with the misfortune of being launched just before the market pandemic crash of the pandemic. However, the ETF has more or less matched index performance since inception with lower risk.
The ETF uses the same strategy as iShares.
How to Use Low Volatility ETFs
However, investors should be aware that these low-volatility strategies often don’t hold rapidly growing companies even if they are part of a flagship index due to their volatility. Tech companies have been the biggest drivers of this market rally and usually have a very low weightage or no weightage in low volatility funds. For example, Shopify has been the biggest winner since the pandemic on the Canadian markets, having gone up 500+%, but none of the low volatility ETFs hold this stock. Instead, investors should build a mix of index ETFs diversified by location or sectors and only buy low-volatility ETFs as a downside hedge.
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Lowest Volatility Etf Canada
ETFs are perhaps one of the best-kept secrets in the stock market and perhaps even the world.
XSLV aggressively pursues low volatility small-cap stocks, and there are a few rare bond funds that try to tame fixed income, but most low-volatility ETFs are invested in the stock market. Such volatility-based ETFs work by tracking a benchmark volatility index (such as the VIX). Still, they do not take positions and work with other funds such as the S & P 500 Index (SPX) or the Dow Jones Industrial Average (DJIA). This combination offers a more diversified portfolio of stocks and bonds than a traditional bond fund. ETFs are set to open on March 1, 2021, to take advantage of the VIX’s decline. It starts with an index of 10 major US stock markets, then selects those that have been least volatile over that period, and then selects those most volatile. Sources: 0, 5, 6
It tries to offer a basket of low volatility, but if it is difficult to see the difference, imagine this: an inverse volatility ETF moves in the opposite direction to the VIX, rather than vice versa, and vice versa. Sources: 0, 5
In short, small-cap value ETFs have the potential to provide investors with capital appreciation and low volatility. (read: ultra-low – volatility). The CBOE Volatility Index (VIX) is often used to proxy for ETF volatility, which many investors use to hedge their investment portfolios. The Vix ETF is a general “volatility ETF” that aims to have high volatility stocks in the portfolio. By dividing risk between mid-caps and dozens of stocks, you reduce risk by focusing on lower volatility. Sources: 0, 5, 9
For example, if you believe that short-term volatility may increase, you want to reduce your volatility risk. ETF might be suitable for you, and you may like the benefits of the ETF, but using other options such as BMO Nesbitt Burns’ BMO S & P 500 ETF can potentially lower your risk profile even further. Sources: 2, 4
You will also find leveraged volatility ETFs that increase returns and inverse volatility ETFs that offer inverse returns compared to the returns realized in the benchmark volatility index. Despite the relatively low dividends and fees, the biggest drawback to remember is that the ETF’s low volatility is not a volatility value. A volatility ETF can be a good option for investors who want to use an ETF instead of an index or hedge against indices, but not necessarily for all investors. Sources: 5, 7
The underlying volatility index (ETF) of the S & P 500 Index is comprised of its lowest – realized volatility. It does not follow the same methodology as the benchmark index but somewhat different rules for each index. Sources: 0, 10
Low volatility ETFs comprised 23 ETFs traded in the US market with a total market capitalization of $1.5 billion. The ETF is worth $591 million, according to the most recent data from the Securities and Exchange Commission (SEC). Sources: 1, 8
ETF is a publicly-traded fund (ETF) that tracks the performance of the S & P 500 Index, Dow Jones Industrial Average (Dow) and Standard & Poor’s 500 Index. The fund seeks to achieve its investment objectives by investing directly or indirectly in securities under normal market conditions, including stocks, bonds, investment funds, ETFs and other securities with a weighting of at least 10% that are short-term. They have access to a diversified portfolio of funds with an average market capitalization of over $1.5 billion. Diversified portfolios are an excellent way to invest for the future, according to the US Securities and Exchange Commission. Sources: 5
Low volatility ETFs brought in a total of 71% under management, 23% of which were traded on the US market. Below is a list of the best options for investors looking to use an ETF to take advantage of market volatility. This is the lowest volatility ETF in Canada with a market capitalization of $1.5 billion and is one of only two ETFs with an average market capitalization of less than $2 billion. Sources: 0, 3, 5
This page lists low volatility ETFs listed on US exchanges and the ETF database that records them. This page provided a listing of low volatility ETFs on the US and Canada exchanges and a link to an ETF database with information on all ETFs in the United States. This page lists volatility ETFs on a US or Canada exchange and links to an ETF database with data on all ETFs. Sources: 11
This page contains a list of low volatility ETFs listed on US exchanges and currently tracked by the ETF database. This page had a list of low volatility ETFs listed in Canada and is currently being tracked by an ETF database. Sources: 11
Cited Sources
- https://www.kiplinger.com/slideshow/investing/t022-s001-10-low-volatility-etfs-for-roller-coaster-market/index.html 0
- https://rrd.by/images/chobani-coffee-vabe/7cb066-volatility-etf-canada 1
- https://www.fidelity.com/viewpoints/active-investor/minimum-volatility-ETFs 2
- https://brinleysgrading.com/rgtxld6/1c8d17-volatility-etf-canada 3
- https://cutthecrapinvesting.com/2019/10/03/a-look-at-bmos-low-volatility-etf-and-mutual-fund/ 4
- http://hbhsfoundation.org/72-musica-bmx/inverse-volatility-etf.html 5
- https://canadiancouchpotato.com/2016/09/20/understanding-the-low-volatility-factor/ 6
- https://www.msn.com/en-us/money/savingandinvesting/2-low-volatility-etfs-for-a-high-volatility-world/ar-BB15ao1H 7
- http://blog.modernadvisor.ca/dont-abandon-stocks-go-with-a-low-vol-etf-instead/ 8
- https://adpwausau.com/crisp-volca-rutherford/small-cap-value-etf.html 9
- https://www.aol.com/news/3-low-volatility-stocks-etfs-170005482.html 10
- https://etfdb.com/etfs/investment-style/low-volatility/ 11