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Low-Volatility, Dividend ETFs Proving Their Mettle in Stock Swoon

Low-volatility and dividend strategies have been relative safe havens as stocks have taken a dive in October.

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This article originally appeared in Morningstar Direct Cloud and Morningstar Office Cloud.

As the stock market has taken a dive in October, exchange-traded funds built around low-volatility and dividend strategies are proving to be a relative safe harbor in the storm.

Meanwhile, small-growth ETFs, momentum strategies, and other tech-heavy ETFs are getting pummeled in a reversal of the trends that had led the market higher over the first nine months of the 2018.

Amid concerns about the impact on the global economy of the trade war between the United States and China, along with Federal Reserve interest-rate increases, the decade-long bull market has taken its steepest drop in years.

Over the past week, all corners of the Morningstar Style Box are suffering losses, as seen below in the Morningstar Indexes Market Heatmap. Small-company stocks have suffered the biggest hit. Here's how the week ended on Wednesday.

For the past month, all three categories of small-company stocks are in correction territory with losses of more than 10%.

It's worth noting that as sharp as the decline in stock prices has been in recent weeks, for the first nine months of the year, equities were generally posting returns above long-term averages, especially growth stocks. As a result, even with the recent declines, many corners of the market are still in the green for 2018, and growth stocks are still posting double-digit returns.

Still, the damage of the past few weeks has been significant among ETFs loaded up with technology and growth stocks. This marks a continuation of the trends we saw earlier in the sell-off, as we highlighted in "What Got Hit Among U.S. Stock Funds?"

The table below highlights ETFs with the largest losses in October as of the close of trading on Wednesday. For this screen, we excluded ETFs with less than $100 million in assets. Only one of the worst performers carries a Morningstar Analyst Rating. 

Among this group, all but one have tech-stock weightings above that of the S&P 500's 21% weighting, and many by 10 percentage points or more. The exception is Invesco DWA SmallCap Momentum ETF (DWAS), which has a tech stock weighting of about 17%, but that is roughly 3 percentage points above its Russell 2000 benchmark.

Here's a look at the sector breakdown for the worst performing ETF so far in October, the Innovator IBD 50 ETF (FFTY). The allocation tells the tale.

However, there have been safe-havens in the sell-off. Here's the top-performing ETFs month to date for October.

The common denominators among this list are low-volatility strategies and dividend plays. In other words, to varying degree, these ETFs are behaving as advertised for investors. And the top-performing ETF during the October swoon, Legg Mason Low Volatility High Dividend ETF (LVHD), marries those two strategies. A look at the sector breakdown for LVHD helps explain its performance.

It's a similar story for the second-best ETF month to date, Global X SuperDividend US ETF (DIV).

The past three months show the benefit of a low-volatility strategy during a downdraft in the stock market.

However, the wide outperformance of low-volatility strategies is a recent development. Here's LVHD versus the S&P 500 over the past three years.

And year to date, even with the sell-off, large-growth stock strategies still dominate 2018’s top performing ETFs.

Tom Lauricella does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.