Do Low Volatility ETFs Deliver?

Low-volatility strategies are designed first and foremost to reduce risk compared with traditional market cap-weighted indexes. But are they worth it?

Mathieu Caquineau, CFA 5 June, 2017 | 3:34PM

Low-volatility strategies have gained significant traction among investors. In the past five years, the number of such funds available in Europe has doubled to almost 100 open-end funds and exchange traded funds. Morningstar research finds that most funds have demonstrated compelling risk-adjusted performance, in agreement with academic research. The US equity market seems to be the hardest to crack for low-volatility funds.

Reducing Risk

Low-volatility strategies are designed first and foremost to reduce risk compared with traditional market cap-weighted indexes. Low-volatility funds have undeniably delivered on that front. Our data shows that, on average, these funds have been able to significantly reduce the levels of volatility when compared with their respective benchmarks and peers in the medium to long term.

Looking at our five regional buckets, we found that low-volatility funds had 11%-25% lower realised standard deviation versus market-cap weighted benchmarks during the trailing three- and five-year periods.

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About Author

Mathieu Caquineau, CFA

Mathieu Caquineau, CFA  Senior Fund Analyst, Morningstar France

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