Stock Market Smarts: Risky Business — or Not?
Risk is a four-letter word, especially if the topic of conversation is retirement savings. Here, we look at new ETF products created to help reduce market risk.
Risk is a four-letter word, not to be spoken in polite company – especially if the topic of conversation is retirement savings.
Thousands of older Canadians learned this when they saw their savings decimated in the crash of 2008, forcing some to delay their retirement plans and others to implement painful lifestyle changes to make ends meet.
If anything, the danger is even greater now. With interest rates near record lows, people are reaching for yield in an effort to obtain better returns. Instead of putting their money into safe, secure guaranteed investment certificates and government bonds, they’re buying dividend stocks and high-distribution funds. That spells risk.
Not even the bluest of blue-chip stocks is immune to a market meltdown – banks, telecoms, utilities, REITs (Real Estate Investment Trusts), even preferred shares collapsed against the wave of sell orders. Most people who held on eventually recovered their losses, but those who panicked and sold were hit hard.
Next, take a look at new ETF products that have been created with the express goal of reducing market risk. Industry leader iShares offers the most diversity with a suite of five minimum volatility funds.
“These funds offer a low-risk portfolio of securities as measured by standard deviation,” explains Pat Chiefalo, head of Canadian products at BlackRock Canada, purveyors of the iShares funds. (Standard deviation is a complex calculation that attempts to quantify how much a stock’s price bounces around compared to the norm. The higher the number, the greater the risk.)
“When equities go up,” says Chiefalo, “they tend to capture much of the upside, but when they go down, these funds don’t decline as much.”
You can see the difference by looking at the sector composition of two funds: the iShares MSCI World Index ETF, which trades under the symbol XWD, and the iShares MSCI All Country World Minimum Volatility Index ETF (XMW). The latter has much lower weightings in such historically volatile sectors as information technology and energy. Conversely, investors get more exposure to traditionally stable areas like health care, telecommunications, and utilities.