MW Worried about the stock selloff? These low-volatility ETFs could help you manage the ups and downs of the market.

By Isabel Wang

Low-volatility ETFs have delivered on their promise to shine during uncertain times on Wall Street

Hello! This is MarketWatch reporter Isabel Wang, bringing you this week's ETF Wrap. In this edition, we look at low-volatility ETFs, which have outperformed the broader market over the past week after President Trump's latest tariff moves fueled investor worries about an economic slowdown and sent shockwaves through Wall Street.

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Low-volatility ETFs have quietly stolen the spotlight this week and so far in 2025, outperforming the broader stock market and delivering on their promise to shine in uncertain times on Wall Street.

Exchange-traded funds investing in U.S. companies that are less sensitive to stock-market turbulence have beaten the S&P 500 SPX and the Nasdaq Composite COMP in the early months of 2025, as investors grapple with uncertainty over economic growth and the potential fallout from President Trump's erratic trade policies.

The $24 billion iShares MSCI USA Min Vol Factor ETF USMV has fallen 1.6% this week, while the Invesco S&P 500 Low Volatility ETF SPLV was off 1.3% in the same period. Their returns have significantly outpaced the 3.6% week-to-date slide for the S&P 500 and the more than 4% decline for the growth-heavy Nasdaq Composite in the same period, according to FactSet data.

For the year, the passively managed USMV and SPLV have also delivered higher returns than major stock indexes - with both funds up around 5% year to date, while the S&P 500 has tumbled 2.4% and the Nasdaq has slumped 6.4%, according to FactSet data.

To be sure, most low- or minimum-volatility ETFs had significantly trailed the broader market over the past two years, when more volatile technology companies and the rising demand for artificial intelligence emerged as driving forces behind the U.S. stock rally in 2023 and 2024.

But this year, investors have grown fearful of a potential full-blown trade war after Trump ratcheted up tariff tensions with major U.S. trading partners, drawing immediate retaliation from Canada, China and Mexico and raising the odds of a recession in the world's largest economy.

These worries have translated into rising volatility in financial markets over the past week. The Cboe Volatility Index VIX - otherwise known as the VIX or Wall Street's "fear gauge" - has surged 26.7% so far this week, on pace for its biggest weekly jump since late December, according to FactSet data. U.S. stocks have also tumbled, with the Nasdaq ending in correction territory on Thursday, while so-called safe-haven assets such as the 10-year Treasury note BX:TMUBMUSD10Y and gold (GC00) have jumped.

See: U.S. stocks bounced back on tariff relief. How to protect your portfolio from more volatility.

Play defense at the expense of growth in rising markets

Many minimum-volatility ETFs such as USMV are overweight defensive sectors like consumer staples XX:SP500.30, healthcare XX:SP500.35 and utilities XX:SP500.55, and underweight tech-heavy groups that dominate the S&P 500, "so they tend to outperform amid rising concerns about economic growth like now," said Jessica Rabe, co-founder of DataTrek Research.

"We continue to believe the 'min vol' strategy of U.S. equity investing is worth a look given increasing concerns about valuations and capital-markets volatility. The goal of this investment approach is to own stocks with fewer swings to the up[side] and downside than the broader market," she said.

Minimum-volatility ETFs have a strong track record of outperforming the overall market during periods of heightened volatility. In June 2022, they experienced "extreme outperformance versus the S&P 500" when worries over sky-high inflation and a hawkish Federal Reserve pushed U.S. stocks into a bear market, Rabe noted. These funds also shined in August 2019 when global trade tensions escalated after the U.S. renewed its tariff war with China.

However, passive minimum-volatility ETFs are "not a style for all market seasons" as they may fail to deliver growth in rising markets, Rabe said in a Tuesday client note.

The table below shows that USMV could only capture anywhere from roughly half to two-thirds of the S&P 500's upside over the last decade, depending on the holding period.

Active low-volatility ETFs could help manage stock-market volatility

For investors who don't want to give up the upside in stock-market rallies, actively managed low-volatility ETFs that invest in quality and more stable companies could provide an avenue to both mitigate downside risk and capture market upside, according to ETF experts at AllianceBernstein.

"There are companies out there that could exhibit really good low-volatility characteristics into the future, and that also we don't see being impacted as dramatically from tariff or political headlines," Casey Hatch, head of equity business development for the Americas at AllianceBernstein, told MarketWatch on Thursday. "Losing less is really important - investors actually win by not losing."

The AB US Low Volatility Equity ETF LOWV is an active fund that primarily invests in U.S. large-cap companies and seeks to outperform the broader market with less volatility. Unlike USMV, which mainly tracks traditional defensive stocks like Walmart Inc. $(WMT)$ and Berkshire Hathaway Inc. $(BRK.A)$ $(BRK.B)$, LOWV takes a tech-heavy approach with Microsoft Inc. $(MSFT)$, Apple Inc. $(AAPL)$ and Alphabet Inc. $(GOOGL)$ $(GOOG)$ as its top three holdings, according to its website.

"LOWV is much more in that camp of the interaction of all the securities that have underlying principles of quality stocks and have stable earnings, and you put those together in a way that tries to minimize that downside risk but still lets you participate in the upside - so that when there are recovery periods [in the stock market], you're moving along with it," said Noel Archard, global head of ETFs and portfolio solutions at AllianceBernstein.

With its tech-heavy portfolio, LOWV has lagged behind the passively managed USMV and SPLV, sliding 2.2% so far this week. But it has still managed to outperform the Nasdaq and the S&P 500 in the same period, according to FactSet data.

LOWV has an expense ratio of 48 basis points, compared with just 15 basis points for USMV and 25 basis points for SPLV, according to FactSet data.

As usual, here's your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.

The good...

   Top performers                                                                                                                                                                      %Performance 
   Global X Defense Tech ETF                                                                                                                                                           10.9 
   YieldMax MSTR Option Income Strategy ETF                                                                                                                                            9.9 
   VanEck Bitcoin Trust                                                                                                                                                                7.5 
   Grayscale Bitcoin Mini Trust ETF                                                                                                                                                    7.4 
   Coinshares Valkyrie Bitcoin Fund                                                                                                                                                    7.4 
   Source: FactSet data through Wednesday, Mar. 5. Start date Feb. 27. Excludes ETNs and leveraged products. Includes NYSE-, Nasdaq- and Cboe-traded ETFs of $500 million or greater. 

... and the bad

   Bottom performers                                 %Performance 
   YieldMax NVDA Option Income Strategy ETF          -16.6 
   Invesco Solar ETF                                 -7.4 
   Invesco Semiconductors ETF                        -6.8 
   SPDR S&P Oil & Gas Exploration & Production ETF   -6.6 
   ARK Genomic Revolution ETF                        -6.4 
   Source: FactSet data 

New ETFs

-- Allianz Investment Management LLC on Thursday announced the launch of the AllianzIM Buffer15 Uncapped Allocation ETF SPBU. The fund seeks to provide capital appreciation with downside risk mitigation by investing in a laddered portfolio of 12 AllianzIM U.S. Equity Buffer15 Uncapped ETFs. Each month, one of the underlying ETFs resets its buffer, helping to smooth out market fluctuations and enhance risk management, the company said in a press release.

-- Touchstone Investments on Monday unveiled the Touchstone International Equity ETF TLCI - an actively managed fund that seeks long-term capital appreciation by investing primarily in large-cap, non-U.S. equity securities, according to a press release.

Weekly ETF Reads

-- State Street's private debt ETF launched with big buzz. What does it hold? (MarketWatch)

-- Bitcoin rout amplified by record ETF outflows, traders say - what investors need to know about 'faster money' (MarketWatch)

-- Markets brace for tariffs on Canada and Mexico to have 'immediate effects' on these sectors (MarketWatch)

-- Wall Street's Leveraged-Stock Boom Gathers Pace With 'MUSK' Fund (Bloomberg)

-- EU think-tank looks to ETFs to boost European defence companies (Financial Times)

-- Investors Flock to Ultrashort Bond and Gold ETFs Amid Market Uncertainty (MorningStar)

-Isabel Wang

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March 06, 2025 18:55 ET (23:55 GMT)

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