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.
“According to Morningstar, since the fund’s inception it has managed to capture roughly 80% of the S&P 500’s upside and only 51% of its downside. These ratios aren’t the only risk metrics that show the fund delivers on its objective. Using the monthly standard deviation of returns over the past one-, three- and five-year lookbacks suggests that the fund is roughly 20% less risky than the S&P 500. The fund’s beta of 0.67 intimates that it might be even less risky than that,” reports ETF Daily News.[related_stories]
The low-vol strategy targets stocks that have lower expected risk or less idiosyncratic risks. Specifically, the strategy focuses on equities that exhibit lower beta, a measure of volatility or systematic risk of a security to that of the overall market. Consequently, minimum volatility portfolios are comprised of stocks that exhibit lower market risk or beta.
USMV “has delivered on its goal of risk minimization, it hasn’t done so at the expense of returns. Year-to-date, the Minimum Volatility ETF has beaten the S&P 500 by about 2%. Since inception, its 90% return narrowly trails the 93% return of the benchmark index,” notes ETF Daily News.
For more information on the low-vol strategy, visit our low-volatility category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.