After a bout of politically induced market volatility, exchange traded funds that track low-volatility strategies continue to outperform.
Over the past month, the iShares Edge MSCI Min Vol USA ETF (NYSEArca: USMV), which selects stocks based on variances and correlations, along with other risk factors, rose 4.4% while the competing PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV), which tracks the 100 least volatile stocks on the S&P 500, increased 5.1%. In comparison, the S&P 500 index dipped 0.3%.
The low-volatility factor investments work on the idea that they help cushion against market turns, limiting drawdowns that investors experience while providing upside potential. Consequently, the low- or min-vol strategies may produce better risk-adjusted returns over the long haul, which has been backed by extensive academic research.
Related: Slow-and-Steady ETFs for a Volatile Market
However, after outperforming for most of the year, some may be wary of valuations within the low-volatility benchmarks. For instance, unlike the main MSCI US Index, the MSCI US Minimum Volatility Index is at an all-time high, reports John Authers for the Financial Times.
The minimum volatility index is trading at a valuation premium or a price-to-earnings multiple 9% higher than the market. In contrast, it has traded in a range of from 26% discount in 2002 to a 28% premium at the market nadir in 2009.