2018 Outlook: Low Volatility and Defensive May Be Best Stock Market Strategy

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The raging bull market in stocks charged on in 2017, and many investors are still considering how they should be positioned for 2018. After gains of 300% from the panic-selling lows of 2009, the bull market is up more than most investors could have ever imagined, and it is now nearing nine years old.

Should investors sell out of stocks and play it safe? Should they get more aggressive and chase the higher gross domestic product and solid business climate? Or should they just stay right where they are?

One strategy that investors can use to be defensive without taking the extremely low return of bonds is with stocks characterized as low-volatility ones. By taking the “low-vol” approach, investors are effectively looking for the upside of the equity market without as much downside when the markets sell off. In some ways it can be considered a “chicken-bull” strategy.

The SPDR S&P 500 ETF (NYSEARCA: SPY) rose 19.38% in 2017, compared with 25.25% for the SPDR Dow Jones Industrial Average ETF (NYSEARCA: DIA). The iShares MSCI Emerging Markets ETF (NYSEARCA: EEM) returned about 34.5% in 2017 for a stellar year, but its top holdings are heavily dominated by stocks in China.

Most Wall Street strategists remain bullish for 2018 and many investors have continued to get back into stocks at the same time that interest rates have finally been raised by the Federal Reserve.

When investors consider that the S&P 500 is now up 300% from the panic selling lows of March 2009, maybe they might want to think about lower volatility strategies. These can include the so-called value stocks and the top dividend stocks, but they can also include some of the low-volatility strategies in exchange-traded funds (ETFs).

24/7 Wall St. has tracked the top ETFs and the top “low-vol” ETFs for broad market performance to show how they have done in 2017. These track the Dow Jones Industrial Average, the S&P 500, international markets and emerging markets as a whole.

After considering the 10 things that could wreck the bull market in 2018, taking a low-volatility strategy might make sense. If the market continues its charge higher, then the strategy should reward investors. If the stock market goes down in 2018, then this strategy should offer a buffer to some of the downside.

Investors should understand that a low-volatility strategy does not mean that it is a “no volatility” strategy. If a rising tide lifts all ships, then the opposite is true as well.

Performance metrics have been used by showing the gain in the net asset value represented at each ETF manager website and also by using FINVIZ for the total return in share prices in 2017. We have included basic tracking and objectives of each ETF, as well as shown the top 10 holdings of each for a better representation of what each ETF really invests in.

Here are five broader strategy ETFs for the chicken-bulls in 2018.

Broad U.S. Low-Vol

iShares Edge MSCI Min Vol USA ETF (USMV) is managed by BlackRock and saw its net asset value (NAV) rise 18.97% in 2017 per the fund’s own data, and the FINVIZ total return screened at a 16.7% gain in 2017. That would be a great year compared to most, and that is close enough to the return of the S&P 500 that the implied downside protection may merit investors’ attention. Investors also have lots of company, with more than $15 billion in assets here.

This ETF seeks to track the investment results of an index composed of U.S. equities that have lower volatility characteristics overall than the broader U.S. equity market. BlackRock also says that the ETF has declined less than the market during market downturns.

Its top 10 holdings are listed as Visa, McDonald’s, Johnson & Johnson, PepsiCo, Coca-Cola, Waste Management, Newmont Mining, Pfizer, Northrup Grumman and Verizon.