Three Low Beta Equity ETFs For A Volatile Market

by on May 11, 2010 | ETFs Mentioned:

So much for a smooth month of May. Recent weeks have taken investors on a roller coaster ride, with the Dow dropping more than 1,500 points last week before skyrocketing higher yesterday. Things have not been any better abroad; the Nikkei lost over 7%, while France’s CAC 40 sunk more than 8% last week week. With a sovereign debt crisis quickly spreading across Europe and a record setting intra-day drop on Wall Street, equity markets appear to be entering a period of heightened volatility (see Ten ETF Charts From The “Flash Crash”). With memories of 2008 still fresh in their minds, many investors have begun looking ways to respond to the choppiness in markets.

While the markets are hopefully not headed for a repeat of the late-2008 plunge, many forward-looking measures of volatility have been on the rise. The iPath S&P 500 VIX Short-Term Futures ETN (VXX), the main ETF gauge for volatility has been soaring as of late, adding more than 50% over the past tumultuous week. This has sent some investors running for the safe-havens of Treasuries and gold (see Gold ETF Rides Chaos To New Record). Others are looking to slide towards the less risky end of the risk spectrum while still maintaining equity exposure in case this past week turns out to just be a minor bump in the road to recovery.

Below, we have highlighted three equity ETFs which may help to give investors more peace of mind; they all have betas less than 0.75, suggesting that they are less volatile than the S&P 500. But they also consist of equities, meaning that investors in these funds will be able to participate in any upside (also see Volatility ETFs: How And How Not To Use).

Utilities Select Sector SPDR (XLU)

Beta=0.69. Often seen as one of the least volatile industries, the most widely-held utility ETF generally fluctuates less than the general market. Of course, this works in both directions; over the past 52 weeks XLU has lagged behind the S&P 500 as equities surged. But last week, the S&P 500 SPDR (SPY) lost about 6.4% while XLU lost just 4.4%, suggesting that the fund may be a decent option in choppy and uncertain markets.

XLU allocates roughly 72% of its assets to large cap securities, helping to explain the lack of volatility. In addition to lower levels of volatility, the fund offers investors a robust dividend yield of 4.37%, an attractive current return (see more fundamentals of XLU).

Pharmaceutical HOLDR (PPH)

Beta=0.64. Big pharma is another industry that tends to be less volatile (despite the recent political developments). Similar to XLU, PPH has underperformed the broad markets over the last year, but turned in much smaller losses during last week’s chaos. PPH achieves this low beta by investing in just 16 firms, most of which are some of the biggest and most widely-known names in the country. The fund allocates 25% to Johnson & Johnson (which has a beta of just 0.60), 17.6% to Pfizer (beta of 0.67) and 17.2% to Merck (beta of 0.78). The fund allocates 60.6% to giant cap securities and 14.6% to large cap firms, meaning that components aren’t likely to be heavily impacted by one or two drugs like many names in the health and biotechnology sector. For more information on the unique properties of HOLDRs, make sure to read Five Facts About HOLDRs Every Investor Must Know.

Consumer Staples Select Sector SPDR (XLP)

Beta=0.54. No matter what happens with the economy people have to eat, which is good news for the firms in XLP. The fund tracks the Consumer Staples Select Sector Index which includes companies from the following industries: food & staples retailing; household products; food products; beverages; tobacco; and personal products. The fund focuses on giant and large cap firms which make up over 93% of the total assets. Among its top holdings are Procter & Gamble (15.8%), Wal-Mart (10.2%), and Phillip Morris International (8.5%), all of which have relatively stable operations (see more of XLP’s holdings). Again, XLP has lagged the S&P over the last year, but came through last week’s turmoil in relatively good shape, reflecting its potential use as a low volatility play (for other options see Nine Twists On Sector ETF Investing).

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Disclosure: Eric is long PM.