Do low-volatility ETFs actually work?

The lower-beta path to improved risk-adjusted performance

It was a volatile year for stocks. In 2025, we went from deep lows in April (a response to Donald Trump’s tariffs) to all-time highs in the fall. While all this was happening, we are hearing more about high stock valuations and top economists like David Rosenberg are warning of a possible bear market in 2026. So how do you reduce portfolio risk now?

One of the ways is to own one or more low-volatility funds. These invest in stocks with a low beta, which means their prices move less than the broad market (which has a beta of one). These funds tend to underperform when the markets are strong, but limit the downside when equities fall. This doesn’t mean they won’t lose value in a crash. But the downside should be less than with higher-beta stocks.

Do they actually work? Yes, says Chris Heakes, senior portfolio manager with Harvest ETFs, which is based in Oakville, Ontario. He noted a recent study prepared by BNP Paribas that looked at the performance of U.S. equities between 2011 to 2025, which covered the period that included the Covid market drop. The table shows a striking correlation between lower volatility/lower beta stocks, and improved absolute and risk-adjusted performance outcomes.

As you can see, the lower the beta (bottom line), the higher the annual performance (top line). The synergy isn’t 100% perfect, but the pattern is clear. Stocks with a beta of 0.74 generated an  annualized return of 9.1%. Those with a beta of 1.50 returned 6.3% on average.

This study relates to U.S. stocks; however, the correlation is similar in other markets. “The Low Vol effect has been particularly strong in resource-based markets such as Canada and Australia,” Mr. Heakes said. “In general, though, across all regions, low volatility has tended to create higher annual returns.”

My view is that low-volatility stocks are especially well suited to older investors who want to keep a significant amount of their assets in equities while at the same time reducing exposure to a market crash.

We have four low-volatility funds on my Income Investor newsletter recommended list. They are all performing well, but none are generating high cash flows. For example, the BMO Low Volatility Canadian Equity ETF (TSX: ZLB), shows a gain of 25.26% for 2026, and an average annual compounded rate of return of 12.78% a year since it was launched in October 2011. But its annualized distribution yield is only 1.95%.

Harvest recently launched a low-volatility fund that uses covered call options to enhance income. The Harvest Low Volatility Canadian Equity ETF (TSX: HVOL) makes quarterly distributions of $0.09 per unit ($0.36 a year) to yield 2.5% at a recent price of $14.42. That’s a better yield than any of our current low vol picks, but the fund has only been operating since April so it’s too soon to project long-term results.

Investors should also note that the use of covered calls, while increasing cash flow, tends to reduce total returns.

Bottom line: BMO Low Volatility Canadian Equity ETF would be suitable for investors seeking total return. If cash flow is your priority, monitor Harvest Low Volatility Canadian Equity ETF. Consult with your financial advisor before investing to ensure the ETFs align with your financial objectives and tolerance for risk.

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 © 2026 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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