What strategies are suitable for risk-averse investors?

Low-volatility ETFs tend to beat their benchmarks during periods of market dislocation, says Greg Zdzienicki, vice-president, client portfolio manager, equities, CIBC Asset Management. 

In a June 27 interview, Zdzienicki said low-vol funds have proven their value time and time again in recent market turbulence.

During the tech bubble, for example, the MSCI World Index was down about 20%, while the S&P Global Low Volatility Index was up about 3%. And during the financial crisis from 2007 to 2009, the MSCI World Index was down about 32%, while low-volatility strategies were down about half of that.

Listen to the full conversation on the Advisor To Go podcast, powered by CIBC Asset Management.

More recently this year, when tariff uncertainty hit markets, low-volatility strategies in Canada were down between 2% and 4%, while the index was down about 12%, Zdzienicki said. In the U.S., the S&P 500 was down about 18%, while low-volatility strategies were down about 6% during that same period.

“Across all regions, whether international, U.S. or Canadian, we saw low-volatility strategies perform exactly as expected, protecting investors on the downside,” he said.

The ability to provide better capital preservation and faster recovery in uncertain market conditions makes low-volatility ETFs “an attractive option for risk-averse investors,” he said. “They also have enhanced diversification. This tends to improve diversification when integrated into various investment styles, be it growth, value or core.”

Zdzienicki said when it comes to sectors, Canadian low-volatility dividend ETFs tend to have more exposure to financials, utilities, consumer staples and communication services. These sectors have lower volatility characteristics and “tend to have better cash flows, higher profitability and tend to pay dividends.”

Meanwhile, information technology, consumer discretionary and materials will be underrepresentend in Canadian low-volatility dividend ETFs, he said.

“If we take a look at the U.S., we do see a significant difference between the exposure to the broad market and a low-volatility dividend ETF,” Zdzienicki  said. “And that is what really drives that diversification benefit.”

Low-volatility ETFs in the U.S. are overweight consumer staples, financials, and utilities, and underweight consumer discretionary and information technology, he added.

“Internationally, we will see very similar type exposures, and again, we will have less exposure to areas like technology, materials and consumer discretionary,” Zdzienicki  said.

And when it comes to market cap, he said Canadian and international ETFs are in the $10 [billion] to $50-billion range, while U.S. ETFs are in the $50 [billion] to more than $100-billion range.

Overall, investors seeking a more stable return profile to reach long-term goals should consider low-volatility ETFs, Zdzienicki  advised.

“Low-volatility strategies offer a defensive investment approach, and they can lower a portfolio’s sensitivity to movements in the overall stock market, also known as beta, thereby reducing their overall volatility and enhancing risk-adjusted returns over the long term,” he said.

This article is part of the Advisor To Go program, sponsored by CIBC Asset Management. The article was written without input from the sponsor.