But those might not do well, depending on why the market is falling. When the onset of the pandemic rattled markets in 2020, low-volatility ETFS performed dismally since investors turned toward tech stocks and other work-from-home beneficiaries.
That could change this year.
“If we are in an environment where investors hide out in Meta and Alphabet, then this ETF isn’t going to do well,” said Todd Rosenbluth, head of ETF and mutual fund research at CFRA Research. “But if investors hide out in companies like Procter & Gamble and Pepsi, then this ETF will hold up much better.”
Two of the largest low-volatility products — the S&P 500 Low Volatility ETF (SPLV) and the S&P 500 High Dividend Low Volatility ETF (SPHD) from Invesco — lagged behind the S&P 500 late last year, although they were outperforming it at times in 2022.
For those who want extra protection against losses, a class of funds called “buffer ETFs” could help, with a catch. These products, also called defined-outcome funds, use options to smooth drops over a certain time period, usually a year. You won’t have to deal with complicated options strategies yourself. That means, however, you could miss out on big gains if stocks rally.
Another choice is “covered call ETFs,” which invest in equities while using options to generate a steady income stream.
“They can be a replacement for fixed income because they’re designed to hold up better, and it gives you the income you would want,” Rosenbluth said.
Define your bond time-horizon strategy
Bonds are back in fashion, seen as a safe bet when equities struggle but better than cash.
Rosenbluth is a fan of short-term bonds, which usually mature in one to five years, because they’re less sensitive to rising interest rates.
“They’re a good place to park your money and stay liquid and earn a little bit of income,” he said.