Low volatility ETFs smooth out the ride during the normal ups and downs. But can they also protect against the big drawdowns that occur in more severe stock market corrections? So far so good for BMO’s Low Volatility ETF. It held up better than market in the most violent market correction we’ve ever experienced.
As a backgrounder please have a read of …
A look at BMO’s low volatility ETF and mutual funds.
Yes you can access that low volatility option by way of ETFs and mutual funds. That was a very popular post and many readers liked what they saw. Those who invested have been rewarded with some greater stability.
Year to date, ZLB is down 12.3% compared to the TSX composite that is down 14.4%. Over the last year BMO’s Low Volatility ETF is down just 5.9%. The composite is down 10.4%. The market is continuing to like lower volatility stocks that they see as carrying less risk and greater prospects. The outperformance of ZLB becomes more exaggerated as we look to 3-year, 5-year and inception numbers. As I often write, greater success can come by way of ‘losing less’.
As we enter a recession and months and perhaps years of greater uncertainty, the low volatility factor may continue to prove its worth.
The sectors.
As I had penned in my original review, the Canadian low volatility sector fund appears to create much more sensible sector allocation. Of course the Canadian market is notorious for being unbalanced and concentrated in financials and resources.
ZLB provides a fix in many ways.
If we do enter a prolonged recession or depression-like recession we already have a good idea as to what sectors will get hit hard. We know what sectors may continue to shine or at least limp through the economic downturn. As a general framing we know that consumer staples, utilities and communication services may perform well, while the energy sector (producers) look like dead investments walking (over the near term).
ZLB is set up quite well, recognizing that it’s impossible to (completely) stay away from sectors that will get hard hit. REITs will certainly continue to come under pressure. The REIT index fell by some 50% in the recent correction. Financials face an uncertain period over the next year and beyond.
The top holdings.
Off the top ZLB offers some gold and precious metals exposure by way of Franco-Nevada. Gold is known as a wonderful portfolio diversifier (asset class). It shows its worth in periods of extreme stress and protects in certain conditions if we experience a major economic shift. Will we see inflation, stagflation or a deflationary period?
We may need more that our classic mix of stocks and bonds and sensible geographic diversification. That is a more than interesting top holding. For an overview of Franco-Nevada you can click on this video link. That is a company and very unique approach that has beat the gold price and the gold equity index. Well, it’s more than a beat, it’s a thumping.
We also see the top 3 Canadian grocers in the top 10. That’s an obvious source of portfolio stability. We gotta eat. And those companies are also in a fortunate oligopoly setting. On Seeking Alpha I had added (suggested) those companies to the greater wide moat portfolio.
We’re going grocery shopping for the Canadian Wide Moat Portfolio.
When we go down the list we see more utilities, telco’s and other assets that appear to be well positioned for the times ahead. Certainly, you may be of the opinion that the stock market correction is behind us. Nobody knows the future. I am of the mind that the market might one day pay attention to depression-like economic numbers and forecasts. Many companies and sectors might deliver some troubling revenues, profits and forward looking projections. We’ll have to wait to see.
All said, some investors may seek greater stability. Here are the next top holdings.
I continue to be a fan of this approach and the sector allocation.
Weekend Reads.
Weekend reads kicks off with the Weekend Reads from Mark Seed at myownadvisor.
Michael Batnick at the irrelevant investor offers up on why stocks aren’t down more.
And Market Watch explains why it’s not so crazy that stock markets are rising even though 26 million Americans are out of work. Yes, stock markets can ignore depression-like numbers.
Ben Carlson is making sense of a stock market that doesn’t make any sense.
On the other side of the coin, economist David Rosenberg explains how the world will look much different once the pandemic ends. I’ll give you a little snippet …
Last week I had posted on when and how will life get back to normal?
Mathew at All About The Dividends discusses a new investment strategy.
On milliondollarjourney Kyle Provost interviews John Robertson the author of The Value of Simple. Here’s a thoughtful piece …
An intelligent conversation about health and investing in a COVID-19 world.
On findependencehub Steve Lowrie offers that rebalancing in down markets is scary but important.
On The Motley Fool Mathieu Litalien suggests 3 cheap stocks for your TFSA.
And last but not least, Tomas Pueyo is a must read for those who attempt to stay on top of the COVID-19 developments and projections. On the economic restart Tomas is back with Part 2. The basic dance steps everyone can follow. If we all wear masks we will give the virus ‘nowhere to go’.
Be safe. Be smart. And please be generous. Help your favourite charity.
While I do not accept monies for feature blogs please click here on the mission and ‘how I might get paid’ disclosures.
Dale
The Sunday Investor
Nice to see kind words being thrown around about low-volatility portfolios! They certainly do help in down times but it’s also important to flag a common misconception about these types of portfolios and that they underperform during economic booms. That’s simply not the case – one of the biggest studies of U.S. stock returns from 1968-2012 found that low-volatile portfolios dramatically outperformed during recessions and slightly outperformed them during expansions.
” From 1968 through 2012 in the U.S. equity market, portfolios of low risk stocks deliver on the promise of lower risk as planned, but with surprisingly higher average returns. A dollar invested in the lowest risk portfolio grew to $81.66 while a dollar invested in the highest risk portfolio grew to only $9.76.”
Link here: https://www.hbs.edu/faculty/publication%20files/final%20decomposition%20of%20low%20risk_36c1e488-c814-496a-bd3b-113e54b3be1d.pdf
Nice that you brought up Franco-Nevada as well – to me, it’s the only gold stock worth investing in Canada. No other gold stock has come close to matching its average historical return-risk ratio in the last 15 years. Glad to see it’s doing its job in this recession.
I’ve tried to base my strategy around reducing equity risk through the more balanced approach you’ve described in your post. Thanks for getting the word out about how sensible this approach is!
Gus
Thank you so much for this article Dale,
I do hold ZLB in my TFSA as my single holding and yes i’m impressed with the way they structured this etf also i like to ask what would you think about BMO’s ZLU ? I do hold Vun and Zdy in my TFSA and although the yield is good on Zdy but it took a big hit during this market correction so i’m kind of thinking if i should switch to ZLU instead of ZDY .
Thanks
Cheryl
You’re right about the REITs falling bad. The majority of my portfolio is ETFs, but about 25% I hold REITs, mostly for dividend income. Fortunately, so far, none of my dividends have been affected. H&R REIT took the biggest fall. From trading in the $22 mark for the past 2 or 3 years, it closed on Friday at $8.70, and that’s bouncing back from it’s low. I have no plans to sell anything in the near future, so as long as everything comes back eventually and the dividends hold steady I’ll be happy. I’m guessing the REITs are taking a hit due to people being unable to pay rent.
Bob Wen
“ An intelligent conversation about health and investing in a COVID-19 world.”
The link in the above paragraph is to the wrong location. This post can be deleted after reading.
Dale Roberts
Thanks Bob, that is fixed. Thanks for that. Not enough sleep these days. Too much COVID research.
Dale
Michael
Great review of the ZLB, been a fan since day 1. Thanks Dale.