You are a prudent investor. You are concerned about central-bank shenanigans, the trade war and the momo (momentum) crowd running up technology stocks. If you could buy only one ETF for these times, this high-performing, low-volatility ETF is it. Let’s explore with the help of a chart.
Please click here for an annotated chart of the iShares Edge MSCI Min Vol USA ETF
Here it’s compared with the SPDR S&P 500 ETF
Please note the following:
• The chart shows a surprise. In a rising market controlled by the momo crowd, the low-volatility ETF, in theory, should underperform the market. After all, there is not supposed to be a free lunch. In exchange for low volatility, investors are expected to give up some gains in a rapidly rising market. Of course the reverse is also true — in a falling market, the low-volatility ETF should fall less than the market.
• The chart shows the Arora buy signal for the market on Christmas Eve. In hindsight, Christmas Eve turned out to be the major bottom of this swing.
• The chart shows that the low-volatility ETF fell in the Arora buy zone, offering subscribers a great opportunity to buy it.
• The chart shows that since the low on Christmas Eve, the low-volatility ETF has returned about 26%, matching the return of the benchmark S&P 500 Index
• The chart shows that during the recent market swoon in May, the low-volatility ETF barely budged, while the S&P 500 fell about 8%. This is the magic of low volatility. Similar conclusions can be drawn by comparing the low-volatility ETF to the Invesco QQQ Trust
which tracks the Nasdaq-100 ETF Index, and the Dow Jones Industrial Average
• Of note is the difference in top holdings of the low-volatility ETF compared with SPY, QQQ and the Dow Jones Industrial Average. Apple
Amazon
and Google holding company Alphabet
are among the top holdings of the S&P 500 as well as the Nasdaq 100. Dow Jones Industrial Average top holdings include Boeing
UnitedHealth Group
Home Depot
and Goldman Sachs
• Interestingly, the largest holding of the low-volatility ETF is a gold stock, Newmont Goldcorp
As of this writing, gold has broken out. Please see “Gold may be entering a binary event as Trump-Xi are set to meet.” Other holdings of note are Visa
Coca-Cola
McDonald’s
and Verizon Communications
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Caution
In practice, it is important to diversify and not just hold one ETF. It’s also important to note that this ETF has moved up about 26% from the low. That is an unusually strong move in such a short period. In general, it is advisable to wait for a pullback in the Arora buy zone, which we call the “best way.” Those who are under-invested or do not want to wait can follow the “good way.” In the good way, an investor would start a small scale-in on a shallow dip and accumulate more on a pullback.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.