- Trends supporting more of the same in 2015. In contrast, we believe there is a continued case for high quality and low volatility outperforming this year. The Greek election is a risk to the stability of the eurozone, geopolitical issues linger with social strains in Europe starting to show given terrorist attacks in France, the high yield market has yet to clearly stabilize due to weak oil prices, and one has to wonder when the markets will put pressure on the Fed to raise rates in the face of stronger growth and job creation. The chart below displays the relationship between S&P 500 Index 30-day historical volatility and reserve bank credit (a measure of the assets held by the Federal Reserve). The 30-day historical volatility is still on the lower side of the chart’s history, but it appears to be showing signs of bottoming and has gyrated with expanding range. More clearly stated: The chart indicates that the macroeconomic environment is still supportive of low volatility and risk management strategies.
In addition, we believe the desire for yield is likely to be slow to disappear and that this is a benefit to high dividend strategies. Even with the Fed ending QE and the US economy showing signs of strength, low fixed income yields overseas, QE by the European Central Bank and the Bank of Japan, and demographic factors seem to be capping interest rates. The 30-year Treasury yield is flirting with the 2008 and 2012 lows around 250 basis points.3
Bottom line: A mixture of market and economic trends may be supportive to the small cap, low volatility factor in 2015. There is a case for relative strength in the small cap factor based on last year’s relatively weak performance and the backdrop of a strong dollar and firm US economy. At the same time, though there no assurance that the low volatility factor will provide low volatility or better performance than other factors mentioned, it appears that volatility management will still be necessary in the opening months of 2015 given the risks present in the global investment landscape. Learn more about the PowerShares S&P SmallCap Low Volatility Portfolio (XSLV), which seeks to give investors exposure to both the small cap and low volatility factors.
1 Source: Bloomberg LP as of Dec. 31, 2014
2 Source: Bloomberg LP as of Jan. 9, 2014
3 Source: Bloomberg LP as of Jan. 12, 2014
Important Information
Dividends/High Dividend: Shows how much a company pays out each year to shareholders relative to its share price. Companies characterized as high dividend tend to issue higher annual payouts. Securities that pay high dividends as a group can fall out of favor with the market, causing such companies to underperform companies that do not pay high dividends.
Dividend Growers: Ranks securities by their dividend yield while seeking to increase overall portfolio yield and potential for improved price performance.
Low Volatility: Utilizes volatility rankings while seeking to minimize the effects of market fluctuations. Volatility is a statistical measurement of the magnitude of up and down asset price fluctuations over time. There is no guarantee that low-volatility stocks will provide low volatility.