Why Investing in Low Volatility Stocks is a Superior Strategy
In May of 2011, Invesco introduced the PowerShares S&P 500 Low Volatility ETF (SPLV). At least four more low volatility ETFs were created during 2011, including USMV, EEMV, ACWV and EFAV. Since the start of 2012 another seven such ETFs have entered the market: EELV, IDLV, PHDG, XSLV, LGLV, SMLV, and XMLV.
You may wonder what’s motivating this increased interest in low volatility instruments. After all, those of us who employ short-term strategies like day trading and swing trading have typically been trained to look for the most volatile stocks, on the basis that those are the ones that are most likely to produce outsized price moves within our desired time-frame.
Part of the answer is no doubt related to the lack of volatility in the current market environment. Below is a 5-year chart for the CBOE Volatility Index (VIX), which estimates expected volatility of the S&P 500 by averaging the weighted prices of SPX puts and calls over a wide range of strike prices.
We can see that since mid-2009, the value of VIX has been below 30 for the majority of the time, and since the start of 2012 has only spiked above 20 a few times. These relatively low volatility levels have made it particularly challenging for many short-term traders to make money, and even many hedge funds have struggled to beat the performance of benchmark indices. Consider the five-year performance of the popular SPDR S&P 500 ETF (SPY):
In 2007 we published an original study which showed that investing in low volatility stocks outperformed investing in higher volatility stocks. In 2010, we presented a newer study at NAAIM (National Association of Active Investment Managers) where we showed that simply avoiding the 100 most volatile stocks in the S&P 500 with a quarterly rebalancing added over 700 basis points to an equally weighted buy and hold portfolio.
Low volatility investing is a superior strategy and is especially appropriate for retirement accounts where larger sums of money need to be protected.
If you have an account of $50,000 or more and would like to learn more about low volatility investing in S&P 500 stocks, please click here to view a webinar on our S&P 500 Low Volatility Growth Portfolio.