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3 Great ETFs for Rocky Markets

These exchange-traded funds could provide a smoother ride and provide a little peace of mind.

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Bryan Armour: Investors may be looking for relief after markets have gone from bad to worse in 2022. Inflation and recession fears dominate the headlines, leaving investors to question where we go from here. Managing the uncertainty in your portfolio won't give you fodder for small talk at cocktail parties, but it's critical for keeping your financial goals on track. Today, I'm sharing three ETFs that can smooth out returns during rocky markets and reintroduce a little peace of mind. 

The first ETF on my list is Silver-rated iShares MSCI Global Minimum Volatility Factor ETF, ticker ACWV. This defensive fund provides exposure to global stocks and is constructed to dampen volatility and offer a smoother ride than the broader market. It uses an optimizer to select and weight stocks from the MSCI All Country World Index in a way that minimizes expected volatility. Not only does the strategy focus on investing in low-volatility companies, it also takes the correlation between holdings into account to minimize the portfolio's overall volatility. 

This fund's global portfolio makes it a one-stop shop for managing the uncertainty in your portfolio's stock sleeve. Allocating globally prevents investors from succumbing to home-country bias and its associated risks. The strategy also tamps down concentration risks by limiting the weight of individual stocks, while keeping country and sector weights close to their weight in the parent index. This effectively mitigates risk while keeping the portfolio representative of the global market. 

Minimizing volatility has been an effective strategy so far in 2022. But its success isn't limited to recent market turbulence. Over the past 10 years, this fund has pummeled category peers on a risk-adjusted basis, thanks to its low volatility and competitive returns. Its low cost also provides a durable advantage over the long run. There's no doubt that this fund will continue to take the edge off rocky markets. 

The second ETF on my list is Silver-rated Franklin U.S. Low Volatility High Dividend ETF, whose ticker is LVHD. In 2022, two of the most effective strategies have been dividend stocks and taking risk off the table. This fund attempts to marry both strategies by using an optimizer to maximize yield and minimize risk. Cutting down risk doesn't solely come from favoring stocks with lower return volatility. The strategy requires companies to have sufficient earnings and cash flow to support their dividend payments and penalizes stocks with higher earnings volatility.

The strategy's optimizer includes several constraints to limit the portfolio's firm-specific risk and capacity concerns. However, it doesn't employ any constraints relative to the broader market, which may lead to differentiated returns.

The fund's focus on limiting risk moderates its quest for yield. But this approach has been effective, nonetheless. The strategy has been a consistent outperformer during periods of heavy declines, like so far in 2022 and during the COVID-19 drawdown in 2020. The fund has exhibited significantly lower volatility and outperformed its average category peer on risk-adjusted terms over the past five years.

The third ETF on my list is Gold-rated iShares Core U.S. Aggregate Bond ETF, whose ticker is AGG. This strategy tracks the Bloomberg U.S. Aggregate Bond Index, which includes taxable, investment-grade U.S.-dollar-denominated bonds with at least one year until maturity. Most qualifying bonds fall into three categories: U.S. Treasuries, corporate bonds, or agency mortgage-backed securities. The index weights its holdings according to market value, tilting the portfolio toward the largest and most liquid issues.

In the first quarter this year, high inflation and a hawkish Fed gave the Aggregate Bond Index its worst quarter since 1981. While this doesn't inspire much confidence, bonds may once again work as a hedge for stocks now that many of the risks are priced into the bond market. 

Changes to the current expectations for interest rates will likely have an opposite effect on stocks and bonds. Now that interest-rate expectations have risen off the floor, the bond market should help balance stock-heavy portfolios that shunned fixed income over the past year and give investors a smoother ride.

Bryan Armour does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.