MW These ETF strategies can help lower your investment risk as tariffs ramp up stock-market uncertainty

By Philip van Doorn

Stocks selected for lower volatility can smooth out returns and provide protection during periods of economic weakness or market turmoil

Even before President Trump's dramatic announcement late on Wednesday of a slew of new tariffs on imported goods from dozens of countries, the stock-market gyrations of 2025 had underscored the importance of strategies that lower investors' risk through diversification, low volatility and income generation.

Nick Kalivas, Invesco's head of factor and core ETF strategy, highlighted two of his firm's exchange-traded funds that may be well-tailored for a year of trading-policy jitters in an interview with MarketWatch.

Premarket trading action on Thursday pointed toward a brutal trading session. But through Wednesday, the S&P 500's SPX information technology companies was down 12.8% for the year, excluding dividends. The consumer discretionary sector had fared even worse with a 14% decline for 2025 through Wednesday.

There is quite a bit to unwrap with so many possible consequences to economic growth, inflation and the value of the dollar and various ways for investors to address the ongoing policy changes in Washington. Here is a sampling of the latest MarketWatch coverage:

-- Trump's very, very, very simple way of calculating reciprocal tariffs

-- What investors should do now after Trump's Liberation Day tariff shock, says this top strategist

-- Trump's tariffs are having a surprising impact on the U.S. dollar. Here's how investors can benefit.

-- Brett Arends: We told you in January how to Trump-proof your portfolio - you can still do it

-- Apple's stock is getting pounded on tariff news. Don't freak out just yet.

Addressing volatility to limit your risk from index funds

Long-term investors need to expect periods of broad declines for stock prices. But it is no fun to wait through these periods, and a low-volatility might be appropriate for you, depending on your day-to-day risk tolerance.

Setting reasonable expectations

You are probably aware that we have enjoyed an unusually strong period for the U.S. stock market - especially the S&P 500 SPX, which is weighted by market capitalization. This means the giant technology firms that are so prominent in the index have helped propel its return over the past five years. You might believe that a "set it and forget it" strategy of holding shares of an inexpensive S&P 500 index fund might makes diversification of investment risk, but the index is heavily weighted at the top.

The SPDR S&P 500 ETF Trust SPY, which tracks the index by holding all of its components weighted by market capitalization, is 18.5% weighted to its largest three holdings - Apple Inc. $(AAPL)$, Microsoft Corp. $(MSFT)$ and Nvidia Corp. $(NVDA)$ The fund's largest 10 holdings make up more than a third of the portfolio.

This year so far has been one of reversals for the S&P 500. Investors fear the unknown. Uncertainty over how the Trump administration's trade and tariff policies will be clarified, how other countries will react and how negotiations may temper the ultimate effect of tariffs on consumers have combined to help push the large-cap U.S. benchmark index down 3.3% this year through Wednesday, following gains of 25% in 2024 and 26.3% in 2023.

All investment returns in this article include reinvested dividends. For funds, all returns are after expenses.

But a further look back at performance can lower your expectations.

Here are the average annual returns for the index for various long periods through Wednesday:

        Period        Average annual return 
        3 years                        9.3% 
        5 years                       19.4% 
       10 years                       12.6% 
       15 years                       13.2% 
       20 years                       10.3% 
       25 years                        7.5% 
       30 years                       10.5% 
       35 years                       10.6% 
                            Source: FactSet 

The three-year average return reflects the stellar performance in 2023 and 2004 cited above, but also the index's 18.1% decline in 2022, when high inflation and rising interest rates helped push investors out of stocks.

The high average returns for five, 10 and 15 years emphasize the influence of technology giants on the index. The average returns for 20 years and the longer periods on the table may represent a more reasonable set of expectations for long-term average returns for the S&P 500.

The low-volatility anomaly

Kalivas cited academic studies meant to "poke holes in the capital asset pricing model," which is the idea that the more risk you take, the higher investment returns you should realize over the long term.

"But within specific asset classes, such as large-cap stocks or midcap, [the researchers] found it was not the case. The lower-risk securities generated outperformance on a risk-adjusted or even an outright basis," Kalivas said. "This was called the low-volatility anomaly."

You can read about this phenomenon in this article by Robeco Head of Conservative Equities and Chief Quant Strategist Pim van Vliet, co-author of "High Returns from Low Risk: A Remarkable Stock Market Paradox."

Two ETF approaches to low-volatility stock selection

The Invesco S&P 500 Low Volatility ETF SPLV tracks the S&P 500 Low Volatility Index, which is maintained by S&P Dow Jones Indices. The fund holds the 100 stocks in the S&P 500 with the lowest price volatility over the previous 12 months. The fund is reconstituted along with the index four times a year: in February, May, August and November.

When the fund is reconstituted each quarter, its holdings are weighted by the inverse of the index provider's volatility scores for the S&P 500.

That's it. The idea is to hold the 100 least-volatile stocks in the index, with no caps on weightings or on exposure to particular sectors or industries. "There is not enough dispersion in volatility to skew the weightings. Also, it is not uncommon for the low volatility factor to cluster or concentrate in sectors," Kalivas said. He added that "there have been periods with 3% utilities and with 30% utilities" in the fund's portfolio.

"The idea is the harvest the factor as best as possible," he said.

So the Invesco S&P 500 Low Volatility ETF can provide additional diversification to an investor who holds shares of an S&P 500 index fund. Its top 10 holdings make up 12% of the portfolio, and only one holding among its top 10 (Berkshire Hathaway Inc. $(BRK.B)$) is also within the top 10 holdings of the SPDR S&P 500 ETF Trust.

Invesco takes a similar approach with the Invesco S&P MidCap Low Volatility ETF XMLV, which holds lower-volatility stocks from within the S&P Mid Cap 400 Index MID. And for investors who want a higher exposure to technology stocks, the Invesco QQQ Low Volatility ETF holds QQLV 25 lower-volatility stocks among the components of the Nasdaq-100 Index NDX, which itself is tracked by the Invesco QQQ Trust QQQ.

And why not combine the low-volatility approach with dividend-stock selection? The Invesco S&P 500 High Dividend Low Volatility ETF SPHD tracks the S&P 500 High Dividend Low Volatility Index. The index contains 50 stocks weighted by a combination of S&P's two-step process when the index is reconstituted twice a year in January and July. First, S&P identifies the 75 stocks in the S&P 500 with the highest trailing dividend yields and places a cap of 10 stocks within each of the 11 sectors of the index. These are then ranked by price volatility over the previous 252 trading days. The 50 least-volatile stocks make up the reconstituted index and are weighted by dividend yield.

Invesco's SPLV dividend fund has an additional cap of 3% on individual holdings when the index is reconstituted, along with a 25% cap on each of the 11 sectors of the S&P 500.

This fund pays a monthly dividend. Its trailing yield, based on the past 12 dividends and Wednesday's closing share price, has been 3.27%. In comparison, the S&P 500's weighted dividend yield is 1.35%, according to FactSet.

So again we have an approach that provides diversification from the cap-weighted S&P 500, with an interesting weighting scheme. Kalivas said that the High Dividend Low Volatility ETF's "defensive value" approach can help investors avoid "dividend traps," which are stocks with dividend yields that are very high because investors have been selling them off out of fear the dividends will be cut.

The ETFs' performance

Here are two sets of performance data for SPLV and SPHD against SPY.

First, here is how the three funds have performed this year, as well as in 2002 when the S&P 500 suffered a broad decline, and for three and five years through Monday:

   Fund                                                2025 return  2022 return  3-year return through March 31  5 year return through March 31 
   Invesco S&P 500 Low Volatility ETF                         7.3%        -4.9%                             19%                             77% 
   Invesco S&P 500 High Dividend Low Volatility ETF           4.5%         0.6%                             20%                            106% 
   SPDR S&P 500 ETF Trust                                    -3.4%       -18.2%                             29%                            134% 
                                                                                                                                Source: FactSet 

Both Invesco funds have underperformed the full S&P 500 for three and five years, but both held up nicely in 2022 and have done so again during this year's decline.

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April 03, 2025 10:12 ET (14:12 GMT)

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