Stock Market: Reduce Your Risk With This Low-Volatility Fund
High volatility doesn't suggest a stock should be avoided, rather it indicates that investors should expect large price swings. Photo: alexsl/Getty Images
We’re starting to see a new spike in market volatility. After hitting a one-year peak in early March, the CBOE Volatility Index (VIX) fell by almost half over the following four weeks.
But now it’s gradually climbing again as investors contemplate the long-term effects of the Ukraine war, soaring inflation, rising interest rates, and the on-going impact of the pandemic on supply chains and global growth.
Volatility is a measure of the swings in price of an index or a specific stock. Assets that have high volatility are deemed to be riskier. They are known as high beta stocks. Those which display lower up-down price movements are described as low beta and are generally seen as lower risk.
High volatility doesn’t necessarily mean a stock should be avoided. It simply warns investors to expect large price swings one way or the other. Investors with heart conditions who watch stock prices closely should probably choose lower beta alternatives.
Low-beta stocks are a completely different story. Most Canadian ETF and mutual companies offer at least one and sometimes several low volatility funds (sometimes called minimum volatility). Here’s one example from my Income Investor recommended list.
BMO Low Volatility Canadian Equity ETF (TSX: ZLB).
Background: This ETF invests in a portfolio of large-cap Canadian stocks that have a low beta history, meaning they are less sensitive to broad market movements and, therefore, theoretically less risky. The portfolio is rebalanced in June and reconstituted in December.
Performance: The fund has been moving higher since the start of the year, reaching a high of $42.68 earlier this month. Over the past decade (to March 31), the average annual total return is 12.95 per cent.
Portfolio: There are 47 positions in the portfolio, all Canadian companies. The portfolio is fairly evenly balanced, with Hydro One (4.69 per cent), Franco-Nevada (3.85 per cent), Metro Inc. (3.38 per cent), Fortis Inc. (3.37 per cent), and Emera Inc. (3.37 per cent) being the largest holdings.
In terms of sector breakdown, 21.14 per cent is in financials (a significant underweight from the TSX Composite), 16 per cent in utilities (an overweight), and 12.18 per cent in consumer staples. There are no energy stocks, despite the fact it’s the second-largest sector in the S&P/TSX Composite.
Key metrics: The fund was launched in October 2011 and has almost $3 billion in asset under management. That’s up $2.4 billion at the time of our last update in September 2020. The MER is 0.39 per cent.
Distributions: The fund makes quarterly payments, which are currently running at $0.26 per unit ($1.04 per year). At that rate, the yield at the current price is 2.5 per cent.
Tax implications: In 2021, about 98 per cent of the distributions were treated as capital gains or eligible dividends, making this is a very tax-efficient fund.
Risk: BMO classifies it as low-medium. Although this is a low-volatility fund, it is not immune from stock market risk. However, this fund should hold up better than the broad market in a steep decline.
Conclusion: This ETF is well positioned for current market conditions and offers some downside protection in the event of a continued sell-off.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca/subscribe
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