ETFs for Smoothing Out Marketplace Volatility

Precisely why do we invest? Exactly what really is your own objective?

For many individual investors, whether or not they invest on their own to hire someone, the real objective is simply having enough cash when they need it -- in most cases this means retirement.

If you need to retire then chances are your accumulated savings will go toward supplementing the benefit you will get from Social Security and you'll either have enough saved to offer the lifestyle you desire or we won't.

For those that can reorient their thinking to the extended term as well as to their real objective, a entire new way of investing opens up by making use of the low-volatility ETFs that have recently been created.

The big idea is the fact that these funds go up less than regular market-cap-weighted money during bull phases and go down less during bear phases, thus smoothing out the ride on the method to a similar long-term result.

The advantage to this smoother ride is a smaller likelihood of panic selling at a low mainly because these funds tend to act as advertised: They go down less whenever the marketplace goes down.

The last few months have offered a good litmus test for just what to expect from these types of funds.

Because its inception this past Will, the PowerShares S&P 500 Low Volatility Portfolio(SPLV) is down 1.25% vs. an 8.27% decline for the S&P 500.

SPLV owns the 100 stocks in the S&P 500 with the lowest realized volatility over the last 12 months. Certainly not amazingly, the fund is heaviest in the utilities sector at 32% and the consumer staples sector at 22%. None of the other sectors exceed more than 10% of the fund.

The fund is not riskless, however. Utility stocks tend to be vulnerable to increasing rates as bonds become more attractive relative to high-yielding utilities.

The Federal Reserve will great lengths to keep interest rates low by stating that it won't increase them till at least 2013 as well as by recently commencing "Surgery Twist," in which the central bank sells short-dated debt and buys longer-dated debt. But with rates close to all-time lows it makes sense to be on the lookout for a meaningful turn higher.


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