2 low-risk ETFs for defensive investing

These exchange-traded funds will help reduce the overall risk of a portfolio.

By TheStockAdvisors Jun 11, 2013 10:48AM

Arrow Down Umbrella (© Photographers Choice RF/SuperStock)By J. Royden Ward, Cabot Benjamin Graham Value Investor


I have added some defensive ETFs to my model value portfolio. My objective is to increase the defensive holdings when the stock market rises. I believe this strategy will reduce your risk and increase your profits.


Here's a look at the iShares MSCI USA Minimum Volatility Index ETF (USMV) and the SPDR S&P Dividend ETF (SDY).


USA Minimum Volatility Index ETF seeks investment results that correspond to the price and yield performance of the MSCI USA Minimum Volatility Index.


USMV is currently selling at a very small 0.09% premium to its net asset value. The price to earnings ratio (P/E) of the stocks contained in the ETF is 24.9, and the price-to-book-value ratio (P/BV) is 5.49. Both ratios are a little high, but the beta, which measure volatility, is a low 0.69. Management fees total 0.15%.


USMV is very well diversified with risk spread out over 132 holdings. The largest position consumes only 1.65% of the total portfolio. The 10 largest holdings in order of size are Bristol-Myers (BMY), PepsiCo (PEP), Wal-Mart (WMT), TJX (TJX), Abbott (ABT), Chubb (CB), ADP (ADP), Paychex (PAYX), General Mills (GIS) and AT&T (T).


The five largest sectors are HealthCare, Financials, Consumer Staples, Information Technology and Consumer Discretionary.


A recent report by Morningstar concluded "in nearly every market studied, low-volatility stocks have outperformed high-volatility stocks." USMV is a great addition to everyone's portfolio. I expect USMV shares to reach my minimum Sell Price target of $46.00 within one to two years.


SPDR S&P Dividend ETF holds all the companies in the S&P 1500 Index that have raised dividends every year for the past 20 years. The objective of the ETF is to include companies that have increased their dividends consistently. Only 85 qualify out of 1,500 companies!


Companies with pristine dividend records tend to produce solid earnings and sustainable business models. Also, management is less likely to engage in reckless capital spending if the goal of management is to protect and grow the company's dividend.


SDY is currently selling at a very small 0.09% discount to its net asset value. The P/E ratio of the stocks contained in the ETF is 16.5, and the P/BV ratio is 2.84. Both ratios are reasonable, and the beta is below average at 0.86. Management fees total 0.35%.


SDY is quite well diversified with risk spread out over 85 holdings. The largest position consumes only 2.55% of the total portfolio. The 10 largest holdings in order of size are Pitney Bowes (PBI), At&T (T), Abbvie (ABBV), HCP (HCP), Consolidated Edison (ED), Air Products (APD), General Dynamics (GD), Nucor (NU), Kimberly Clark (KMB) and Leggett & Platt (LEG).


The five largest sectors are Consumer Staples, Industrials, Financials, Materials and Utilities. SDY is a great substitution for bonds because of its 2.8% yield and steady performance. I expect SDY shares to reach my minimum Sell Price target of $100.00 within one to two years.


More from TheStockAdvisors.com

0Comments

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

116
116 rated 1
275
275 rated 2
482
482 rated 3
656
656 rated 4
643
643 rated 5
650
650 rated 6
638
638 rated 7
485
485 rated 8
281
281 rated 9
127
127 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
AAPLAPPLE Inc10
ATVIACTIVISION BLIZZARD Inc10
CTSHCOGNIZANT TECHNOLOGY SOLUTIONS10
FOXATWENTY-FIRST CENTURY FOX Inc CLASS A10
HPQHEWLETT PACKARD CO10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.