Heightened volatility could be on the cards in the equity markets as the earnings season continues at full speed. Most of our readers are familiar with how volatility, a statistical measure, shows the rate at which the price of an asset (such as a stock) increases or decreases over a particular period. Investors regard it as the level of risk associated with changes in price.
We have been in a historically elongated bull market, which could potentially continue well into future months. Yet, the earnings season could easily bring a short-term pause to the positive mood on the Street. Several of the heavyweights reporting this week include Tesla (NASDAQ:TSLA) today, Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), 3M (NYSE:MMM), Advanced Micro Devices (NASDAQ:AMD), Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG) and United Parcel Service (NYSE:UPS) on Tuesday, Facebook (NASDAQ:FB), McDonald’s (NYSE:MCD), Qualcomm (NASDAQ:QCOM) and Boeing (NYSE:BA) on Wednesday and Amazon (NASDAQ:AMZN) on Thursday.
If these names were to disappoint with their announcements, then share prices could easily go down. Many market participants are likely to be concerned that the CBOE Volatility Index (VIX), the premier benchmark of US equity market volatility, could also see spikes, especially in the short run.
Moves in the VIX are usually inversely related to those in the S&P 500, which saw a record high on July 23. Thus, if a number of Wall Street darlings were to miss expectations, those stocks could easily drag down the S&P 500 or other leading indices such as the Dow Jones Industrial Average or NASDAQ 100 Index.
Therefore, today we’ll discuss two exchange-traded funds (ETFs) that could appeal to investors who want to mute stock market volatility in the coming weeks.
1. Invesco S&P SmallCap Low Volatility ETF
- Current Price: $46.54
- 52-week range: $32.01 – $48.10
- Dividend yield: 1.03%
- Expense ratio: 0.25% per year
Our first fund is the Invesco S&P SmallCap Low Volatility ETF (NYSE:XSLV), which invests in stocks that have exhibited low volatility in the past year. The fund started trading in February 2013, and net assets stand around $1.12 billion.
XSLV, which has 122 holdings, tracks S&P SmallCap 600 Low Volatility Index. In terms of sectors, we see industrials (20.8%), followed by information technology (19.59 %), real estate (14.05 %) and financials (10.48%). The top 10 names make up about 11% of net assets.
Among the leading names in the roster are the utility names American States Water Company (NYSE:AWR) and California Water Service (NYSE:CWT); real estate investment trust (REIT) Easterly Government Properties (NYSE:DEA), which manages properties that are leased to US government agencies; Watts Water Technologies (NYSE:WTS), which manufactures plumbing and water quality products; Agree Realty (NYSE:ADC), another REIT that focuses on industrial and retail properties; and North Carolina-based Coca-Cola Bottling Co Consolidated (NASDAQ:COKE), the largest independent Coca-Cola (NYSE:KO) bottler.
The fund returned 35.2% in the past year and over 14% year-to-date (YTD). The ETF hit an all-time high (ATH) earlier in June. We believe a fund that focuses on low volatility small cap names could be a robust addition to many long-term portfolios.
2. Barclays iPath Series B S&P 500 VIX Mid-Term Futures
- Current Price: $25.93
- 52-Week Range: $24.97 - $36.15
- Expense Ratio: 0.89% per year
Our next choice is an exchange-traded note (ETN), an asset class we covered previously in detail. The Barclays iPath® Series B S&P 500® VIX Mid-Term Futures™ ETN (NYSE:VXZ) reflects the market’s view on the mid-term direction of the VIX index. It is an unsecured debt obligation issued by Barclays (NYSE:BCS). The ETN was first listed in January 2018.
VXZ gives access to a daily rolling long position in the fourth, fifth, sixth, and seventh month VIX futures. Thus it could enable bearish investors to hedge portfolios against a potential market decline in the coming months.
Put another way, VXZ is slightly different than the iPath® Series B S&P 500® VIX Short-Term Futures™ ETN (NYSE:VXX), which provides exposure to the value of the near-term futures contracts written on VIX. However, like VXX, the VXZ ETN is not typically suitable for long-term portfolios.
As we have discussed in previous articles, volatility exchange-traded products that use derivative instruments are designed with daily returns in mind. They would, therefore, be more appropriate for sophisticated short-term traders. If the holding period increases, VXZ traders tend to lose money due to moves in prices of futures.