Low Volatility Safe(r) Canadian ETFs and Stocks

Recently we posted about a relatively new flavour of ETF — Low Volatility ETFs — that offer a credible promise of generating both safety and decent returns. In the short time since the post, another Canadian entrant from Invesco, the PowerShares S&P/TSX Composite Low Volatility Index ETF (TSX: TLV), was launched in late April, in competition with the BMO Low Volatility Canadian Equity ETF (TSX: ZLB).

For investors interested in buying individual stocks, these ETFs’ holdings might provide some good buying leads. We can look inside the ETFs to see what stocks are there (by clicking on the Holdings tab in the above provider websites to get an up to date list).

The safety and return promise sure looks good in the short time since the October 2011 launch of ZLB, as we see at a glance in the Google Finance chart below of ZLB’s performance compared to the TSX.

In addition, we’ll double check against these other lists of promising stocks to see what overlaps and repeats there might be:

• Companies whose CEO was amongst the Top 100 for pay but the CEO earned it
• Electric power utilities with solid numbers
• Stingy Investor’s 2012 all-star Canadian stocks
• Companies with consistent five-year dividend growth, both high-dividend yielders and low-dividend yielders

• Stocks on sale in August 2011 — profitable companies with big declines from 52-week highs
• Twelve ultimate buy and hold companies that have survived over 100 years
• Stocks with low volatility over a longer term of three years instead of only the one year measures used by both ZLB and TLV. We picked stocks, using GlobeInvestor’s Watchlist. with a beta, or correlation with the overall TSX, of 0.5 or less.

The more often a stock shows up, the better. Finally, we’ll check some common financial ratios to see whether each stock’s price looks attractive at current prices.

46 Stocks show up in multiple lists

Whether stability is measured by beta, as ZLB does, or by simple volatility of each stock’s market price, as TLV does, the results overlap extensively. More than half the stocks appear in both ETFs, as shown by the green highlighted cells in the detailed table below. When we add other stocks from the promising stocks lists, many stocks show up multiple times. Red text shows TLV stocks that are repeated, while blue text shows ZLB repeats. That’s a very encouraging result — coming at these stocks from different angles at different times produces a consistent thumbs up.

As an aside, we also checked against previous posts on companies with overpaid top 100 CEOs. where no overlaps appeared as we would hope and expect; food companies. where one (Saputo) of our four highly rated companies appeared; beer/wine/spirits companies. where none of the six Canadian companies overlapped as we again would hope and expect since we liked none of them, dividend initiators. where none of the three Canadian companies showed up again.

Which stocks exhibit attractive price and other financial ratios?

We then entered all the stock symbols for the 46 companies into GlobeInvestor’s My Watchlist. a very handy free tool that will display lots of useful financial numbers in customizable or pre-set display formats. The image capture below shows the candidate stocks arranged in ascending order of the most popular value test, the Price-to-Earnings per share ratio. Many of the stocks look reasonably priced, with P/E well below the TSX 60 Index large cap average of 14.7 (from this TMX page ). Many also sport low Price-to-Book ratios, another measure of value.

The evaluation above is not complete, as we would want to look at the level and consistency of profitability, the amount and sustainability of debt and above all, we would want to ask whether there are factors such as new competition threatening the future stability and success of the company. But our digging into the list of low volatility companies shows us some worthwhile possibilities to consider. Or, the investor can simply buy one of the two ETFs on offer to cover all bets and get instant diversification.

Disclaimer. this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

Disclosure. This blogger owns shares in several of the companies discussed in the above post.