Key Points
Some investors are more naturally risk-averse than others, kind of like how some people are afraid of heights while others will willingly go bungee jumping, skydiving, or roller-coaster riding without giving it a second thought.
If you’re in the risk-averse camp, there’s nothing wrong with you. But while your tendency may be to avoid stocks, doing so could make it very difficult to meet your financial goals.
Historically, stocks have outperformed many other asset classes over long periods, making them an important part of most people’s retirement and investment portfolios. But those higher returns often come with volatility, which can be very hard to stomach.
Of course, people who are really prone to panic when the stock market loses value take on a different sort of risk by investing — selling assets at a loss instead of riding things out. If that sounds like you, there’s one ETF worth a closer look.
Is the Vanguard U.S. Minimum Volatility ETF right for you?
The Vanguard U.S. Minimum Volatility ETF (NYSEMKT: VFMV) is designed for investors who want exposure to the stock market while potentially experiencing a smoother ride than they would with a traditional fund.
Unlike a standard S&P 500 (SNPINDEX: ^GSPC) index fund that simply tracks the market, the Vanguard U.S. Minimum Volatility ETF uses an active investment strategy to select U.S. stocks that are expected to experience less price volatility than the market on a whole. At the same time, the fund maintains a diverse asset mix, so you’re not overly exposed to a single market sector.
To be clear, the goal of the Vanguard U.S. Minimum Volatility ETF isn’t to eliminate risk. That’s just not feasible when you’re talking about the stock market. Rather, the fund aims to lessen the severity of market swings when they happen.
And that could work to your benefit. If the value of your portfolio doesn’t move so wildly, you may be less likely to panic and make unfavorable decisions that impede your long-term financial goals, like selling shares at a loss.
Plus, like many Vanguard funds, you’re not looking at outrageous fees. The Vanguard U.S. Minimum Volatility ETF has an expense ratio of 0.13%. That’s not as low as some of Vanguard’s passively managed ETFs, but it’s a reasonable fee for an actively managed fund.
Know the trade-offs before you invest
While the Vanguard U.S. Minimum Volatility ETF can be a breath of fresh air if investing in the stock market makes you nervous, lower volatility doesn’t come without compromise. Since the fund prioritizes stability over maximizing returns, it’s likely to lag the broader market.
An S&P 500 ETF, for example, may deliver considerably stronger portfolio returns over time than the Vanguard U.S. Minimum Volatility ETF. If you’re decades away from retirement, those strong returns aren’t something you should easily want to give up. But if you’re nearing retirement and are trying to shed some portfolio risk, the Vanguard U.S. Minimum Volatility ETF could be a sound investment.
Also, as mentioned earlier, the Vanguard U.S. Minimum Volatility ETF isn’t a risk-free option. It can still lose value during market downturns, and you must be willing to accept that.
But all told, if fear is keeping you out of the stock market, the Vanguard U.S. Minimum Volatility ETF could be a good fit. Though you may end up sacrificing some upside, what you might gain is more peace of mind when the market gets rocky. And if that’s what allows you to put money into the stock market and avoid rash decisions when things go south, it may not be a bad trade-off.
Should you buy stock in Vanguard Wellington Fund – Vanguard U.s. Minimum Volatility ETF right now?
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Maurie Backman 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.
