Do Low Volatility ETFs Equal Higher Returns?

There are several risks on the horizon for global stock markets capable of elevating levels of market volatility. Could a strategic beta ETF be the answer to investors' prayers?

Dimitar Boyadzhiev 6 November, 2015 | 9:00AM
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As the market events of the past summer reminded us, volatility is a fact of investing life. However, for many investors it can be a rather unnerving experience; and it is one that has become more frequent. Data shows that the number of trading days in which popular indices, such as FTSE 100 and S&P 500, have moved over 2% either up or down, has more than tripled over the past three decades. This is perhaps unsurprising, given the financial market rollercoaster we have experienced since 2008.

Looking ahead, there are several risks on the horizon for global stock markets capable of elevating levels of market volatility. Of these, China’s failure to manage its slowdown is the one playing strongly in investors’ minds, as it has the potential to reverberate worldwide.

Low Volatility as a Strategy

Against this backdrop, a growing number of investors have been turning to low volatility strategies in a bid to set their equity portfolios on a smoother path and reduce overall risk. The basic idea of low volatility – also known as minimum variance – strategies is that of selecting and weighting constituents on the basis of historical volatility. This is a simple, but seductive story. Academic studies show that low volatility strategies have delivered a consistent 20-40% reduction in volatility relative to the broad market; depending on geography and period.

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About Author

Dimitar Boyadzhiev  is a Passive Strategies Research Analyst for Morningstar