6 Value, Low-Volatility ETF Picks for Q4

This is a good time to think about investing in exchange-traded funds. ETFs have been a popular choice for investors seeking a relatively low-cost way to diversify across asset classes, and most major discount brokers now give investors the ability to buy ETFs commission free.

For investors who are managing taxable accounts, ETFs can also be a smart choice in the last few months of the year when many mutual funds make taxable distributions of capital gains and income to shareholders. Most ETFs don't pay out capital gains, and they typically distribute income quarterly.

Given the explosive growth of ETFs in recent years, the question is, which ETFs should you own now? Some ETFs are bringing in strong returns while others haven't kept up this year, so start with funds that are in favor now. Lately that's been ETFs that invest in U.S. stocks, specifically U.S. large-cap stocks, dividend-paying stocks, and low-volatility stocks. Foreign and smaller-cap stocks just haven't kept pace.

Then, focus on finding ETFs that trade well. A thinly traded ETF often has wide spreads between the bid price (the price someone is willing to buy the ETF) and the ask price (the price someone is willing to sell it), and the spread can add up to far more than a trading commission.

Here are four core stock ETFs that FundX owns now, plus two leading sector ETFs we own, for investors who are interested in taking a little more risk.

Diversified ETFs

Invesco S&P 500 Low Volatility (SPLV)
iShares USA Min Vol (USMV)

Low volatility stocks have been some of the best performers this year. Invesco S&P 500 Low Volatility ETF, which tracks the100 stocks in the S&P 500 with the lowest volatility over the past year, has outperformed the S&P 500 Index for the year ending September 30, 2019. SPLV owns 100 stocks with about 50% in utilities and financial services companies. USMV has twice as many positions and has more exposure to technology and consumer companies.

Similar in name and performance, these two ETFs are fairly correlated. They represent lower volatility holdings that have showed consistent outperformance during the recent market turbulence.

Vanguard Dividend Appreciation (VIG)

This fund offers another way to be a bit more defensive in equities—by investing in stocks with high dividends, which tend to hold up during market downturns. The ETF looks for stocks with increasing dividends. While this strategy doesn't necessarily lead to a higher yield, it can lead to strong outperformance as it has so far this year. While some dividend ETFs focus on utilities stocks, VIG gives you exposure to industrial and consumer companies.

Invesco Dynamic Large Cap Value (PWV)

Growth stocks have been in favor for years, but there's been a shift to value strategies in the last six months. This quant-based ETF focuses on value stocks in the large-cap space. The system looks for stocks with the greatest potential for future growth. PWV has a lean portfolio of 50 stocks, including many financial names.

Sector ETFs

iShares US Home Construction (ITB)
SPDR Utilities (XLU)

Lower interest rates have favored home builder and utilities stocks, and ETFs can be an easy way to get exposure to these leading areas. These two funds have good volume and were strong performers both in September and year-to-date. Remember that sector ETFs are volatile and have above-average risk, so these funds should be used for the more aggressive part of your portfolio.

Jeff Smith is a managing partner with FundX Investment Group, a San Francisco-based registered investment advisor that has managed portfolios of funds for high-net-worth individuals, corporate retirement plans and foundations since 1969.