Defensive ETFs: Too Good to Be True?

Defensive strategies, like those followed by low-volatility ETFs, can produce better risk-adjusted returns while smoothing out the highs and lows of the market

Alex Bryan 18 May, 2016 | 11:15AM

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Low-volatility strategies offer defensive exposure to the stock market, attempting to give investors a smoother ride with better performance during market downturns. In exchange, they tend to lag during strong rallies. That's an attractive trade-off for risk-averse investors. There are other ways to reduce risk, such as allocating a larger portion of a portfolio to cash or bonds and less to stocks. But low-volatility stocks will likely offer a better risk/reward trade-off than the broad stock market or a stock/bond portfolio of comparable volatility.

There should be a positive relationship between risk and return. Why else would investors bear the extra risk? 

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About Author

Alex Bryan  is an ETF analyst with Morningstar.

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