Please ensure Javascript is enabled for purposes of website accessibility

Stock Market Wrap-Up: Why This Safe-Stock Strategy Hasn't Worked in 2020

By Dan Caplinger – Jun 25, 2020 at 4:53PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Bear markets are nothing new, but the rules changed this time around.

Thursday's stock market action reflected the tug of war going on right now between bulls and bears about the likely future course of the global economy. The rebound over the past several months has stemmed from rising optimism about getting past the worst of the COVID-19 pandemic, but with the coronavirus stubbornly sticking around and showing up more prevalently in new areas, many worry that a less favorable outcome is likely. The Dow Jones Industrial Average (^DJI -1.71%), S&P 500 (^GSPC -1.51%), and Nasdaq Composite (^IXIC -1.51%) were relatively quiet today as market participants tried to pick sides.

Today's stock market

Index

Percentage Change

Point Change

Dow

+1.18%

+300

S&P 500

+1.10%

+33

Nasdaq Composite

+1.09%

+108

Data source: Yahoo! Finance.

For many investors, the return of stock market volatility in 2020 has been unwelcome, and they've been taken by surprise by the ferocity of the declines and subsequent bounces. However, some investors who anticipated the potential for a bear market are even more upset, because the investments they chose to help them manage their risk level haven't produced the results they expected.

In particular, low-volatility ETFs are designed in the hope that they'll provide some ballast to portfolios by moving less violently than the overall market. Unfortunately, some of the most popular such offerings -- including iShares Edge MSCI Minimum Volatility USA (USMV -1.15%) and Invesco S&P 500 Low Volatility (SPLV -1.35%) -- have underperformed the market, taking investors on nearly as wild a ride as they would've experienced by simply owning an S&P 500 index fund.

USMV Chart

USMV data by YCharts.

What went wrong?

The coronavirus bear market in late February and March was surprising not just because of its speed, but also in which stocks fared the worst. After a 10-year-long bull market that sent high-growth stocks soaring, many investors expected that it would be those high-flying growth leaders that would have the furthest to fall in a downturn.

Instead, many high-priced growth stocks continued to do well even as the rest of the market struggled. Some of the biggest winners were in technology, where many rising stars had their stocks soar on their prospects for helping businesses survive the economic fallout from pandemic-related closures.

Technology stocks tend to be volatile, and so it's harder for them to show up in a low-volatility ETF. Currently, the iShares low-volatility ETF has about 18% of its assets in tech, compared to 23% for the S&P 500. The Invesco ETF weighs in with just a 9% allocation to tech, costing that fund even more in relative performance.

Person wearing suit holding bull and bear figurines in two hands.

Image source: Getty Images.

On the other hand, some sectors that you'd ordinarily expect to behave more conservatively didn't. For the iShares fund, heightened exposure to financials proved extremely costly, because big banks took it on the chin for several reasons. Yield curves flattened as rates fell, and worries about credit quality caused bank stocks to underperform badly against the S&P 500. For the Invesco ETF, dramatically overweight exposure to industrials stocks proved problematic, with cyclical stocks suffering even more than normal from factory closures and other measures designed to stem the spread of COVID-19.

There's no such thing as a sure thing

Many investors look for ways to protect themselves from downturns, and the low-volatility stock approach has indeed been effective in the past. But as with all things related to investing, there's no guarantee that what worked before will work again. Investors in these funds learned that the hard way, and it's important to look at your portfolio critically to assess real risk against everything that could happen.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Invesco S&P 500 Low Volatility ETF Stock Quote
Invesco S&P 500 Low Volatility ETF
SPLV
$57.83 (-1.35%) $0.79
iShares Trust - iShares Edge MSCI Min Vol USA ETF Stock Quote
iShares Trust - iShares Edge MSCI Min Vol USA ETF
USMV
$66.10 (-1.15%) $0.77
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$28,725.51 (-1.71%) $-500.10
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
^GSPC
$3,585.62 (-1.51%) $-54.85
NASDAQ Composite Index (Price Return) Stock Quote
NASDAQ Composite Index (Price Return)
^IXIC
$10,575.62 (-1.51%) $-161.89

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
326%
 
S&P 500 Returns
102%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/02/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.