Low-Volatility Stocks Rally 8% as AI Trade Stumbles and VIX Spikes

By Grace Kim

The Invesco S&P 500 Low Volatility ETF has rallied more than 8% over the past month, while the S&P 500 lost almost 4% over the same stretch. That 12-percentage-point gap is the clearest sign yet that investors are ditching the AI trade for stocks that move less.

Anxiety in the U.S. stock market has surged amid a sharp selloff in artificial-intelligence names and stubbornly high bond yields. As high-flying momentum stocks stumble, their low-volatility peers are cushioning portfolios against the turbulence. The Cboe Volatility Index — Wall Street's "fear gauge," better known as the VIX — recently hit its highest level since the spring.

"It's basically a collection of stocks that are a little bit less speculative," said Chris Zaccarelli, chief investment officer for Northlight Asset Management, in a phone interview Tuesday. "As volatility increases, these are the kind of stocks that people are less likely to sell first."

What happened on Tuesday?

U.S. stocks sold off. The S&P 500, the Dow Jones Industrial Average and the tech-heavy Nasdaq Composite all finished in the red after a hotter-than-expected inflation report revived fears of more aggressive Federal Reserve interest-rate hikes. Bond yields surged.

Low-volatility names sidestepped the slide. The Invesco S&P 500 Low Volatility ETF, the Fidelity Low Volatility Factor ETF and the iShares MSCI USA Min Vol Factor ETF all posted modest gains, according to FactSet data.

So far this month, the Invesco fund has gained 2% against the S&P 500's 0.8% loss, per FactSet through Tuesday.

What's inside these funds?

The Invesco S&P 500 Low Volatility ETF tracks the 100 S&P 500 securities with the lowest realized volatility over the past 12 months. At the end of October, its biggest sector exposures were:

• Utilities
• Financials
• Real estate
• Industrials
• Consumer staples

The fund holds Berkshire Hathaway and utilities WEC Energy Group and Evergy, according to data on Invesco's website.

Even low-volatility ETFs with heavy tech exposure are winning. The Fidelity Low Volatility Factor ETF's top two holdings as of Monday were Apple and Microsoft, and the fund also holds Google parent Alphabet, Amazon.com and Broadcom. It's still beating the S&P 500 in November and over the past month.

Where is the money going?

Inflows are picking up. Over the past month through Monday, FactSet data showed:

• Invesco S&P 500 Low Volatility ETF: roughly $30 million of inflows
• Fidelity Low Volatility Factor ETF: more than $55 million of inflows
• iShares MSCI USA Min Vol Factor ETF: almost $263 million of outflows — but a nearly $71 million inflow on Monday, its biggest daily gain since Sept. 21

That single-day swing at iShares suggests the rotation into defensive funds is accelerating, not fading.

Why now?

Low-volatility stocks may be "a little bit more stable when the market gets more jittery," Zaccarelli said. And with U.S. stocks about four years into a bull market, "people get a little nervous about whether those gains will hold."

If inflation keeps running hot and the Fed stays aggressive, the flow of cash into low-beta funds looks set to continue.