Specifically, SPLV shows a 3-year trailing standard deviation of 8.79 and a Sharpe Ratio of 1.67, while the S&P 500 has a 9.59 standard deviation and 1.61 Sharpe Ratio, according to Morningstar data. Additionally, USMV shows a 8.24 standard deviation and a 1.83 Sharpe Ratio. Standard deviation is a measure of dispersion from its mean, so a greater deviation reflects greater volatility. Additionally, the Sharpe Ratio is a measure of calculating the risk-adjusted return and a greater value typically reflects a more attractive risk-adjusted return.
However, due to their conservative tilt, the strategies would underperform in periods of bullish market rallies. Additionally, looking ahead, the low-volatility strategy could underperform in a rising rate environment.
“Their absolute returns may be less attractive going forward,” according to Morningstar analyst Michael Rawson. “Stocks with low volatility tend to be less sensitive than average to the business cycle and experience slower cash flow growth as the economy expands. Expansionary economic environments often lead to an increase in interest rates. Because stocks in this fund may be growing more slowly, they may have less earnings growth to offset the negative impact of rising interest rates than the broad market.”
For more information on the low-vol strategy, visit our low-volatility category.
Max Chen contributed to this article.