With Election Day almost here, equities could be volatile over the next several weeks, so investors ought to consider the PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV) and the iShares MSCI USA Minimum Volatility ETF (NYSEArca: USMV).
USMV selects stocks based on variances and correlations, along with other risk factors. 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.
MSCI, though, pointed out that the min-vol index is within one standard deviation of its historic premium to the market, so the strategy is not too overvalued, yet.
Consequently, the chances of the strategy falling off ahead is more likely. Nevertheless, there is a chance of a more serious market plunge, which could cause the min-vol strategy to shoot up, with valuations growing to a much higher premium.