Uncertainty is the market’s current buzz word. Concerns about policy, recession risk, inflation, consumer confidence, economic growth, and geopolitics have stock prices on a rollercoaster ride this year. Investors are holding tight to the handlebars. One of the key metrics making news lately is the VIX — the fear gauge. The Cboe volatility index is at historically high levels, having practically doubled in just a couple of weeks as markets try to price in all this uncertainty surrounding us.
The VIX curve is currently in backwardation, and while that isn’t unusual, it could be telling us that “the bears have taken control of the market,” according to Jim Carroll, advisor and volatility expert, also known as the @Viixologist. When the volatility premium is higher in the near term, it suggests it’s a less-than-friendly environment for long equities. A selloff in stocks is what we have been seeing.
Knowing where we’ve been isn’t the same as knowing where we are headed, and when it comes to VIX and equities, no one knows what happens next. That lack of clarity has investors looking for all sorts of defensive strategies. As S&P Dow Jones Indices’ Anu Ganti colorfully put it, a lot of investors are focusing their allocation decisions on “2Ps: Participation and Protection.”
That could be one of the reasons why we keep coming up against that massive wall of assets sitting in money market funds – the proverbial sidelines of the market. The safety of cash remains a theme in investors’ defensive playbook this year, especially cash that generates some yield.
Amid Volatility, Can’t Get Enough Cash
When it comes to ETF allocations, we see that expressed in the growing appetite for safe, cash-like exposure through ultra short-dated bond funds. ETFs like the iShares 0-3 Month Treasury Bond ETF (SGOV ) and SPDR Bloomberg 1-3 Month T-Bill ETF (BIL ) are among the year’s 10 most popular ETFs. Each is shelling out yields above 4% practically risk-free. Together, they’ve picked up more than $10 billion in net assets year to date.
The actively managed JPMorgan Ultra-Short Income ETF (JPST ) is another popular trade this year. The fund is yielding about 4.5% in a portfolio with target duration of less than one year. Nearly $3 billion in net new assets have found their way into JPST in 2025. And money market ETFs are one of the latest innovations in the industry, looking to cater to this investor demand.
Popular Equity Trade: Going Abroad
Outside of cash, on the equity side, the pursuit of defensive exposure has taken many forms. One notable example is broad diversification through additional international equity exposure, especially international developed markets. Attractive relative valuations and supportive monetary policy is said to be pushing prices higher vs. U.S. stocks.
Funds like Vanguard Total International Stock ETF (VXUS ) and SPDR Portfolio Developed World ex-US ETF (SPDW ) have been among asset gathering leaders this year. It looks that the popular call to diversify and go international – something we hear on repeat every year – is finally materializing and delivering investors the goods.
Overlooked Factor Opportunity?
In the first two months of 2025, we’ve paid a lot of attention to the style battle between value and growth, to the detriment of the latter. Growth has been correcting while value has been making up for lost time – a dynamic we’ve all been closely watching.
But on the factor front, it’s low volatility that’s shining brightest, not that anyone has paid it much attention. The factor has had an underwhelming stint recently, but in 2025, it’s outperforming the S&P 500 and all other factors. (See the latest data from February (monthly) performance below):
A look at the Invesco S&P 500 Low Volatility ETF (SPLV ), which owns the 100 least volatile stocks in the S&P 500, shows that sector exposures are a key driver of performance. Utilities, industrials and financials lead the portfolio sector weightings right now. That allocation changes overtime and is rebalanced quarterly, but in 2025, it has worked well.
What’s interesting about the low volatility factor is that it itself carries tilts towards other factors such as value and high dividends – both strong this year.
Advantages of Low Volatility
To put the fund in style-box perspective, about 20% of SPLV is large-cap value vs. 2% large-cap growth, according to Invesco data. There’s a similar value tilt in its mid-cap exposure. Top holdings here include names like Berkshire Hathaway, Procter and Gamble, Coca Cola.
Year-to-date, SPLV is up over 3% while the SPDR S&P 500 Trust (SPY ) is down about 5% – an eight point difference between results.
SPLV seeks to provide a pureplay capture of the low volatility factor within the S&P 500 universe, but it’s not the only low vol ETF in the market. The iShares MSCI USA Min Vol Factor ETF (USMV ) is another similar-but-different popular take. The Fidelity Low Volatility Factor ETF (FDLO) is another. There are a few.
Despite positive performance, this is a slice of the equity market that hasn’t attracted a lot of investor interest this year, probably because of recency bias. The factor has underwhelmed in the recent growth-focused market. But if concerns about high volatility persist and starts to rob investors of their sleep, low vol ETFs could quickly become an area of the market that takes centerstage in the pursuit of defensive participation.
For a list of low vol ETFs, check our our ETF Database list here.
For more news, information, and analysis, visit VettaFi | ETFDB.
