How to Soften Volatility's Blow

The S&P 500 SPDR Trust (SPY) has rocketed 8.0% in 7 trading sessions. Equally impressive, only one of those days logged a loss.

On the flip side, ”fear trade faves” are hanging tough. SPDR Gold (GLD) is essentially flat over the same 7 days. Similarly, treasury bonds via iShares 7-10 Year Treasury (IEF) are down a mere 0.5%. (Champagne-cork poppers may want to hold off on the Mimosas.)

Do we have a problem here? Probably. The seriousness of the consideration given to QE3 bond purchases at the August FOMC meeting implies that the Fed is running out of “fixes.” In fact, if Bernanke’s Fed had gone ahead with efforts to buy long-maturity treasuries, the activity would likely have continued pressuring the dollar’s value and enhancing gold’s luster.

The reasons for caution are well-documented. The CBOE S&P Volatility Index (VIX) is still north of 30. Copper is still struggling to demonstrate healthy global demand. European debt held by world financial institutions means more mergers, more bailouts, more failures and more uncertainty.

Nevertheless, stocks remain attractive relative to the alternatives. A simple test? How often is the dividend yield of the S&P 500 greater than that of a 10-year Treasury bond? Yeah… pretty rare.

So for those who recognize value in S&P 500 stocks for the long-term, yet don’t have the stomach for quite so much “action,” consider PowerShares S&P 500 Low Volatility Portfolio (SPLV). This ETF seeks investment results that correspond to the price and yield of the S&P 500 Low Volatility Index, which consists of the 100 stocks from the S&P 500 with the lowest realized volatility over the past 12 months. The index components are rebalanced quarterly.

SPLV didn’t avoid the downturn of the previous 3 months. Yet it did minimize the impact through a healthy helping of Utilities (29%) and Consumer Staples (25%). Moreover, the anticipated yield is greater than 3%.

Take note of SPLV’s outperformance below. In fact, it reminds me of another investment that I profiled recently, the WisdomTree Dividend Ex-Financials Fund (DTN). (Review Adjusted For Risk, Ex-Financials ETF Beats The S&P 500.)