By Ian Salisbury

The stock market is starting to look rocky. It seems like a perfect opportunity to play defense with exchange-traded funds that promise to smooth volatility. Investors should be wary, however. While these insurance policies can help you sleep at night, these ETFs come with a steep long-term price.

While 2025 has been a great year for stocks, the market has recently hit a rough patch. On Thursday the S&P 500 fell 1.7%, logging its biggest decline in more than a month. It's more than 2% below its late October record and investors have begun to voice doubts about AI, which has driven returns all year. The tech-heavy Nasdaq Composite is nearly 4.5% off its high.

It's a situation that seems to call for stock market investments that can smooth the market's ups and downs like low-volatility stocks or funds that sell call options to generate income. The iShares MSCI USA Minimum Volatility Factor ETF owns defensive stocks that tend to hold up well in down markets such as healthcare and utilities. The JPMorgan Equity Premium Income ETF sells call options, which allow it to earn extra income which can then be used to cushion moderate stock price declines. Both have "betas" well below the broad market. The first one has a beta of just 0.52, while the second one's beta is 0.65. (An investment with a beta of 0.52 would theoretically fall 5.2%, when the market was down 10%.)

What's not to like? In the long run, investors often pay handsomely for this security. While the S&P 500 has posted average annual returns of 15% over the past five years, neither of these funds have returned more than 10% a year on average.

To be fair, the funds are working as advertised. JPMorgan Equity Premium Income's summary prospectus states the fund's goal is "to seek current income while maintaining prospects for capital appreciation" -- pointedly not promising to keep pace with the S&P 500. The iShares MSCI USA Minimum Volatility Factor ETF's website says it aims to "seek risk-reduction at the core of your portfolio, with fewer swings -- up or down -- than the market."

Still, investors with strong stomachs may do better by leaning into the market's volatility, or better yet ignoring it altogether.

"Emotional investors tend to sell when the market is going down and buy when the market is going up," wrote Bespoke Investment Group in a recent note Thursday. "They should do the opposite."

To make the point, Bespoke looked at daily market returns of the SPDR S&P 500 ETF going back to its launch in 1993. A theoretical investor who owned the ETF only days following a market down day would have earned a cumulative return of 851%. A similar investor who owned the index fund only following up days would have seen a return of only 44%.

Still the best returns of all went to investors who simply bought the index and the start and held it for the full period. They would be up 1,274%.

Write to Ian Salisbury at ian.salisbury@barrons.com

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(END) Dow Jones Newswires

November 21, 2025 21:31 ET (02:31 GMT)

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