Scared of a Market Crash? These Funds Offer a Smoother Ride

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The stock market has gone on a roller-coaster ride lately, with the S&P 500 (^GPSC) having plunged almost 7.5 percent in a four-week span and the Dow Jones industrials (^DJI) falling more than 1,100 points between mid-September and mid-October. With the return of market volatility, many investors feel nervous about the prospects for their future returns and don't want to run the risk of further losses.

All stock investments involve risk, but some exchange-traded funds aim at market segments that tend to be less prone to big swings. By investing in these ETFs, you might be able to get all or most of the return potential of a broader-market investment without all the bumps in the road. Let's look at how three ETFs have done during this drop.

1. iShares MSCI USA Minimum Volatility ETF (USMV)

This iShares ETF seeks to provide exposure to U.S. stocks with a reduced risk profile, with the goal of minimizing the stock market's ups and downs. In explaining why an investor might want to own this ETF, iShares points out that it may help reduce your losses during declining markets but still produce positive returns when the stock market goes up.

It's important to understand that minimum volatility funds like the iShares ETF won't eliminate downdrafts but will only reduce their impact. Even with that warning, though, so far during the latest market turbulence, the iShares ETF has delivered on its investment objective. Its decline of just 3.5 percent is less than half of the broader market's drop, showing the value of a portfolio rich in health care and consumer stocks. With relatively small allocations to hard-hit sectors like energy and materials, the iShares ETF will continue to outperform as long as the recent crosscurrents in the market continue to favor its core portfolio.

2. PowerShares S&P 500 Low Volatility ETF (SPLV)

This PowerShares ETF uses a somewhat similar investment objective as the iShares ETF. It looks at all 500 stocks in the index and then selects the 100 that have the lowest volatility measures over the preceding 12 months. With regular rebalancing every quarter, stocks will move in and out of the ETF on a periodic basis. Yet overall, the ETF's portfolio aims to retain the stalwarts of the index.

Interestingly, the PowerShares ETF has a much different sector focus than the iShares ETF, with its largest allocations in financial and utility stocks. With this different philosophy, the PowerShares ETF has recently done better than its iShares counterpart, declining only 2.5 percent or about a third of the broader market's fall over the same period.

3. iShares Select Dividend ETF (DVY)

The iShares Select Dividend ETF isn't specifically aimed at lower-volatility stocks; it emphasizes companies that pay high dividends. iShares selects 100 stocks that have at least five years' worth of dividend payments and looks for those that pay the healthiest yields.

The payouts from dividend stocks generally help them be less volatile than the broader market, as investors can count on at least a base level of income no matter what happens to major market indexes. Moreover, many investors like dividend ETFs like this iShares entry because their income makes it easier to invest for the long run rather than continually having to sell shares to generate necessary cash.

During the stock market's swoon, the iShares Select Dividend ETF has fallen about 4.25 percent, which is still a much smaller drop than that of the S&P 500. That alone doesn't prove that dividend stocks make good low-volatility investments, but with more than half its assets in utilities and consumer stocks, this ETF will likely maintain a relatively smooth ride even if the market drops further.

Be Risk-Smart

No stock investment is completely free of risk. But by looking at lower-volatility options like these ETFs, you can do your best to stay comfortable with your investing over the long haul.

You can follow Motley Fool contributorDan Caplingeron Twitter@DanCaplingeror onGoogle Plus. He owns shares of iShares Select Dividend ETF. To read about our favorite high-yielding dividend stocks for any investor, check outour free report.

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