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3 Low-Volatility Funds in the Zone

3 Low-Volatility Funds in the Zone

It seems like everything is deeply in the red this year, but there has been one bright spot. Low-volatility funds have exceeded expectations with excellent returns. Many have losses below 5%, and some are even in the black. Nearly every one is in their category’s top quartile for 2022. These funds are labeled low volatility, minimum volatility, or managed volatility. And each one tries to be less volatile than its benchmark and generally lose less in downturns. It hasn’t worked as well in other environments, but in this one it’s been great.

Vanguard’s strategy is to select less volatile stocks but maintain sector and country weights in line with its benchmark so that performance can’t stray too far from the benchmark. In addition, the fund hedges all of its currency risk in order to steady performance.

Franklin is an ETF following the QS Low Volatility High Dividend Index. The index screens for stocks with attractive yields, healthy earnings, and low volatility in both stock price and earnings. Then an optimizer adjusts the portfolio for higher yields with lower risk. We rate the fund Silver.

Invesco S&P SmallCap Low Volatility ETF selects the 120 least volatile stocks, and it weights them by using the inverse of their volatility. Unlike the Vanguard, it doesn’t constrain sector bets, so it can have some pretty big sector bets. As a result, we rate it just Neutral.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Russel Kinnel

Director
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Russel Kinnel is director of ratings, manager research, for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He heads the North American Medalist Rating Committee, which vets the Morningstar Medalist Rating™ for funds. He is the editor of Morningstar FundInvestor, a monthly newsletter, and has published a number of prominent studies of the fund industry covering subjects such as manager investment, expenses, and investor returns.

Since joining Morningstar in 1994, Kinnel has analyzed virtually every type of fund and has covered the most prominent fund families, including Fidelity, T. Rowe Price, and Vanguard. He has led studies on the predictive power of fund data and helped develop the Morningstar Rating for funds and the Morningstar Style Box methodology. He was co-author of the company's first book, Morningstar Guide to Mutual Funds: 5-Star Strategies for Success (Wiley, 2003), and was author of the book Fund Spy: Morningstar's Inside Secrets to Selecting Mutual Funds That Outperform, published in 2009.

Kinnel holds a bachelor's degree in economics and journalism from the University of Wisconsin.

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