MSCI USA Minimum Volatlity Index – S&P 500 Performance vs VIX Index
Monthly Difference in Returns (June 2008 – December 2014)
Source: Bloomberg as of 12/31/14
In today’s more turbulent market environment, the lower volatility sought by min vol strategies is particularly appealing to many investors. In January alone, the S&P 500 has experienced a daily change of over 1% in 8 out of 20 trading days, or 40% of the time. As my colleague Nelli Oster explores in her posts on investor behavior, it can be difficult to tune out that degree of volatility and stay focused on your long term investment goals: paying for college, saving for retirement or planning to expand your family.
Where we go from here
Volatility is born from uncertainty: the heightened level of risk we see in capital markets is driven by the divergence across today’s global economy. The catalysts for that divergence — conflicting central bank actions, disparate levels of economic growth across the globe and a long list of geopolitical risks — are unlikely to dissipate any time soon. This means that market volatility will likely remain elevated.
I like minimum volatility for the long haul. It’s a way to participate in equity markets with the potential for less volatility and allows you to stay focused on your investment goals even in turbulent times. As market bumps are a daily reality, min vol may be an appealing investment solution, and can help keep both you and your investment strategy on track.
Sara Shores is Global Head of Smart Beta for BlackRock. You can read more of her posts here.