The S&P 500 Low Volatility Index measures performance of the 100 least volatile stocks in the S&P 500 Index using recent history. Constituent stocks are weighted relative to the inverse of their corresponding volatility, with the least volatile stocks receiving the highest weights.
While these strategies have been successful in producing return streams less volatile than the S&P 500 Index, neither strategy has an explicit mandate to provide downside protection. In fact, during the -45% drawdown in the S&P 500 Total Return Index from 9/12/2008 to 3/9/2009, for example, the declines in the MSCI USA Min Vol Index and the S&P 500 Low Vol Index were -41% and -34%, respectively — each multiple times worse than the performance of either of the two strategies we highlighted in our prior two articles [link and link].
Investment products based on these indexes have become very popular in recent years, likely spurred by the fact that they have significantly outperformed the S&P 500 Index since the beginning of 2014. Viewing performance over a longer period, since the beginning of 2012 for example, reveals that this outperformance disappears. In fact, the graph below, which shows the difference in the returns of the MSCI USA Minimum Volatility Index and the S&P 500 Index on a rolling 12-month basis, illustrates that the relative performance has been a cyclical phenomenon. It also appears that we may now be at or near a peak in this relative performance, which would represent the wrong phase of the cycle during which to invest in this strategy.
We hope that this marketplace review was informative and served to highlight the differences among the various strategies one might consider to create an RMI portfolio. In our own research into RMI strategies over the last several years, our primary conclusion is this: We have found that a combination of the two strategies we outlined in our earlier pieces, [link and link], is likely to be more cost-effective over the long term than any — or any combination — of the strategies covered in this marketplace review.
This material is for informational purposes only. Nothing in this material is intended to constitute legal, tax, or investment advice. Investing involves risk including potential loss of principal.
Giralda Advisors, located in New York City, is an asset management firm that focuses on providing risk-managed exposure to the equity markets with a goal of limiting asset depreciation during both protracted and catastrophic market downturns while allowing substantial asset appreciation in up-trending markets. The Giralda Advisors team welcomes your inquiries. Call 212.235.6801 or visit http://www.giraldaadvisors.com/.