Dissecting A New Low Volatility Strategy

By Todd Shriber via Iris.xyz

For the three years ended Wednesday, Nov. 20, 2018, the S&P 500’s annualized volatility was 12.30 percent and its largest drawdown during that period was 12.70 percent. Narrow the time frame to the fourth quarter of this year (Oct. 1 through Nov. 20) and the volatility picture is much darker. Over that period, the S&P 500’s annualized volatility comes out to 21 percent.

Not surprisingly, the return of elevated equity market volatility is motivating investors to revisit strategies that aim to reduce that volatility, other wise known as low or minimum volatility strategies. The low volatility factor, one of the “big five” investment factors, is accessible via an array of exchange traded funds (ETFs), including the JPMorgan U.S. Minimum Volatility ETF (JMIN).

A primary element of low volatility funds is to perform less poorly when stocks decline, not necessarily capture all of the upside of a strong-trending bull market. As the chart below indicates, the JPMorgan U.S. Minimum Volatility ETF (JMIN) is living up to the “less bad” objective, performing much less poorly than the S&P 500 for the 90-day period ending Nov. 20th.

Factor Intersection

Some critics assert that stocks classified as low volatility are merely quality or value names with a different label. Academics have examined that phenomenon. The 2016 paper “Understanding Defensive Equity” found value stocks and those with strong profitability (quality) tended to be less volatile than the broader market. However, over long holding periods, a portfolio’s low-variance factor exposure can and does shift.

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