Low-anxiety investing

Low-volatility ETFs with fewer hair-raising ups and downs

It’s not an easy time for investors. Stock markets have wavered between relative calm and near panic in recent months, with the worst coming in April after U.S. President Trump unveiled his bizarre tariff program in the White House Rose Garden.

After a steep fall in share prices, President Trump postponed the new tariffs for three months to try to negotiate one-on-one deals with key trading partners. Some deals have been made (European Union), others have not (Canada).

That has people starting to worry again, especially older Canadians who are concerned about their retirement savings. In normal times, we’d probably be seeing many of them moving some of their assets from stocks to bonds. But the bond market has been unusually turbulent, and returns are low. What to do?

For some, the compromise is low volatility ETFs. These funds have a low-beta history, meaning they are less sensitive to broad market movements and, theoretically, less likely to be hit with big losses in a falling market.

We have several of these ETFs on our Internet Wealth Builder newsletter recommended list. Here is a look at how they are doing.

Low-volatility ETFs

BMO Low Volatility Canadian Equity ETF (TSX: ZLB). This ETF invests in an actively managed portfolio of large-cap Canadian stocks. It is rebalanced in June and reconstituted in December. Along with the rest of the stock market, this ETF took a hit in early April in response to President Trump’s tariff wars. However, it has rallied strongly since and is up 69% from its original recommended price.

The fund was launched in October 2011 and has almost $5 billion in assets under management. The MER is 0.39%. There are 52 positions in this equal-weight portfolio, all Canadian companies. Grocery giants Empire, Loblaw, and Metro occupy the top three positions. Utilities Fortis and Hydro One round out the top five. The fund makes quarterly cash distributions, which are steady at $0.28 per unit ($1.12 per year). At that rate, the yield at the current price is 2.1%.  

In terms of sector breakdown, 21.4% of the portfolio is in financials, 18% in consumer staples, 14.9% in utilities, and 12.9% in industrials. Energy, which is the second-largest sector in the Composite, has negligible representation and information technology accounts for only 4.3% of the assets.

This is a very tax-efficient fund. In 2024, about 48% of the distributions were treated as eligible dividends, meaning they qualified for the dividend tax credit if held in a non-registered account. About 45% was classed as capital gains. The remaining 7% was treated as return of capital.

Over the past 11 calendar years, this fund has been down only twice, and both times the declines were minimal. The worst was a drop of 2.8% in 2018. In 2022, which was a terrible year for stocks, this fund lost only a fractional 0.4%. This ETF continues to offer strong downside protection during stock market selloffs. It’s a good choice for conservative investors.

BMO Low Volatility International Equity Hedged to Canadian Dollar ETF (TSX: ZLD). This is the international equivalent of the Canadian Low-Volatility EFT described above. It focuses on stocks from developed countries outside North America. The fund invests in units of ZLI, a companion low-volatility fund that is unhedged. In ZLD, foreign currency exposure is hedged back into Canadian dollars, thereby eliminating one level of risk. We see the same pattern in all these ETFs – a tariff-related slump in April, followed by a recovery. This fund hit a 52-week high of $30.75 in late May but has retreated a little since.

The fund was launched in February 2014 and has $31 million in assets under management. The MER is 0.45%. ZLI, which is the underlying fund, holds 102 stocks, more or less equally weighted. Japan is the number one favorite country, with 17.5% of the portfolio, followed by Britain (12.6%), Germany (11%), and France (10.2%). The fund makes quarterly payments, which are currently running at $0.16 per unit ($0.64 per year), for a yield of 2.1%.

The portfolio is well-balanced, with consumer staples the largest sector at 17.1% followed by financials (13.8%), communication services (13.5%), healthcare (13.4%), industrials (11.9%), and utilities (11.3%).

Most of the distributions are treated as foreign income. That means they are fully taxable in a non-registered account, although it’s partially offset by a foreign tax credit. So, there are some tax advantages here, but not to the same degree as in the Canadian entry.

This ETF is somewhat higher risk than the Canadian fund, as international stocks tend to be somewhat more volatile. That said, European stocks have been strong recently. This ETF is a useful addition if you want some lower-risk overseas exposure in your account.

iShares Edge MSCI Minimum Volatility USA Index ETF (CAD-Hedged) (TSX: XMS). This ETF tracks an index which measures the performance of low volatility U.S. stocks in the MSCI USA Index. The fund is hedged back to the Canadian dollar. This is supposed to be a minimum volatility fund, but it has showed more ups and downs than might be expected. It gained 13.7% in 2024 but so far this year it has added only 5.6%.

The ETF was launched in April 2016 and has $51.8 million in assets under management. The MER is 0.33%. Most of the assets are held in its sister fund, the iShares MSCI MV USA Index ETF (TSX: XMU), which is unhedged. Holdings are equal weighted, with none comprising more than 1.7% of total assets. Top stocks include IBM, Cisco Systems, Microsoft, and Exxon Mobil. Payments are made quarterly. They are not consistent but usually in the range of $0.24 per unit. Trailing 12-month distributions were $1 per unit, for a yield of 2.6% at the current price.

What makes this fund different from the BMO Canadian ETF is its sector breakdown. Over a quarter of the assets (27.2%) are invested in technology stocks. Financials account for 15.2% and healthcare makes up 14.7%.

The fund has lost money in only one year since 2019. That was a drop of 10.9% in 2022, which was a down year across the board for both stocks and bonds as interest rates soared. This is a defensive security. It will limit losses if the stock market retreats but gains will be below average when the market rises.

BMO Low Volatility US Equity Hedged to CAD ETF (TSX: ZLH). This ETF has a similar mandate to XMS, reviewed above. However, it takes a different approach to portfolio construction – it’s actively managed by BMO Global Asset Management whereas XMS is a passive, index-based fund. This ETF has recovered from a couple of deep slumps earlier this year and is now ahead about 5% year to date.

The fund was launched in February 2016 and has assets under management of $70 million. The MER is 0.33%. This is also an equal-weighted fund, but the stocks at the top of the list are quite different from XMS. They include IBM, CBOE Global Markets, Johnson & Johnson, Gen Digital, and Northrup Grumman. Payments are made quarterly and are currently at $0.17 per unit ($0.68 per year). The yield is 1.9%, although that is not guaranteed.

Utilities, at 19.8%, is the largest sector position in the fund. It’s followed by healthcare (17.2%), consumer staples (15.3%), and financials (13.4%). Information technology, which accounted for only 8.9% of the portfolio at the time of our last review, had been bumped up to 13.4%. But that’s still well below XMS, which has over 27% of its assets in the tech sector. This explains why XMS has outperformed in recent years.

In 2024, about two thirds of the distribution was treated as return of capital, meaning it was not taxable in the year received. The rest was fully taxable foreign income, for which unitholders received a foreign tax credit.

This fund and XMS track the same broad market, but the style of management and the resulting portfolio is different. The results over the past two years have been markedly divergent, but longer term the difference is small. This fund has a five-year average annual compound rate of return of 8.8% compared with 9.1% for XMS.

This ETF has done an excellent job of limiting risk. It has lost money in only two calendar years since 2017 and both were small: a 1.3% drop in 2018 and a decline of about 2% in 2023. XMS and ZLH use different strategies, but the longer-term result is similar. On balance, I would give this one a slight edge.

Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.

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Notes and Disclaimer

Content © 2025 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.

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