Investors are pulling back from U.S. equities as rising Treasury yields, $100-plus oil, and policy uncertainty heighten the risk of market volatility. This shift is putting low-beta and minimum-volatility ETFs in focus for those seeking downside protection without leaving stocks entirely.
According to Bank of America, citing EPFR Global data, U.S. equity funds saw $14.2 billion in outflows over the past three weeks. Global equity inflows have also plunged to an average of $7 billion per week, down sharply from $52 billion in July.
BofA strategists warn that market and policy complacency is a “recipe for volatility.” The alert follows the 30-year Treasury yield hitting its highest level since 2007 and Brent crude topping $100 a barrel, while the VIX has climbed above 17.
Low-Beta ETFs Come Into Focus
Low-beta ETFs are ETFs that remain relatively resilient to market volatility, and their coefficient is typically less than one. These funds may not be the favorite of momentum or growth chasers because of their slower growth, but in hard times, these funds keep portfolios safer than most others.
- Invesco S&P 500 Low Volatility ETF (NYSE:SPLV): As one of the most established options, SPLV holds the 100 least-volatile stocks in the S&P 500 based on trailing 12-month volatility. SPLV had a beta of about 0.54 as of today, and $7.1 billion in assets. Its total return was about 4.7% year to date through September 10.
- iShares MSCI USA Min Vol Factor ETF (BATS:USMV): This ETF offers a more diversified approach. With nearly $23.7 billion in assets and a 0.15% expense ratio, USMV targets U.S. stocks with lower volatility characteristics, and has a beta of 0.64. The fund price has grown around 5% year-to-date.
- Invesco S&P MidCap Low Volatility ETF (NYSE:XMLV) and Invesco S&P SmallCap Low Volatility ETF (NYSE:XSLV): These ETFs offer similar strategies. XMLV has a beta of about 0.69 and $738 million in assets, while XSLV has a beta of roughly 0.74 and about $253 million in assets. XSLV was up 12% year to date, at par with S&P 500, highlighting how low-volatility strategies can still participate in equity gains. Meanwhile, XMLV has gained around 7%.
Defensive Without Leaving Equities
While low-beta ETFs cannot eliminate market risk, they reduce exposure to broad swings—a crucial distinction if Bank of America’s warning holds true. As interest-rate risks drive investors into shorter-duration bond ETFs, low-volatility equity funds offer a way to derisk without exiting stocks entirely.
Whether current market complacency can weather another surge in yields, oil, or inflation remains to be seen. If it fails to, low-beta ETFs could quickly shift from a niche defensive move to a central pillar of the market landscape.
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