Simple and straightforward is the way to go, particularly given the shaky start to the year. 

Ask market prognosticators about the recent market rout and prospects for 2016, you will hear a lot about volatility. A recent Barron’s Striking  Price column warned investors that “stocks will do about as well in 2016 as they did in 2015, but with more frequent price swings,” citing central bank actions here and abroad, a shallower option market and lower corporate profit margins as contributors to more market oscillations in the year ahead.

Société Générale strategist Larry McDonald pointed to weak oil prices when he advised investors to “get long volatility.”

And, in a note to clients, Morgan Stanley stock strategist Adam Parker broadly exclaimed “we are likely headed for a choppy year of low returns, and suspect many others think the same.” 

Volatility isn’t good for stock returns. You can see its deleterious effect especially displayed in the wake of drawdowns. A drawdown is a peak-to-trough decline in an investment’s value. A stock that topples from $100 to $80 before starting to recover suffered a 20 percent drawdown. That’s bad news certainly, but what’s worse is this: It takes more than a 20 percent gain to get back to even. To reach $100, an $80 stock must, in fact, rise 25 percent. After a 30 percent drawdown, a 43 percent move is required to recover lost ground. And on it goes. Big drawdowns need even bigger recoveries.

2016 looks to be studded with drawdowns, making it a banner year for low-volatility plays. And that’s good news for manufacturers of certain exchange traded funds (ETFs).

Large-Cap, Low Vol 

There are eight low-volatility ETFs benchmarked to the S&P 500, each trying to solve the drawdown problem in a distinct manner. If we compare these funds to an S&P 500 tracker such as the iShares Core S&P 500 (NYSE Arca: IVV), we can get a sense of their effectiveness along a number of risk parameters. First, there’s the maximum drawdown conceded in the past year. Seven of the low-vol funds countenanced smaller drawdowns than IVV’s 12 percent hit.