Friday, March 22, 2013

The Low Volatility Story in Pictures

Lately I have not been able to help being bombarded by articles extolling the virtues of investing in low volatility (also known as minimum volatility) exchange-traded products. These ETPs typically talk about the tendency of investors to become overly enamored with some of the sexier, more volatile stocks and accordingly bid these up to unsustainable valuations. On the other hand, the tortoise-like approach to lower volatility stocks tends to avoid these stocks that are fashionable for short periods of times, so-called “story stocks,” momentum favorites, and stocks with hockey-stick charts that sometimes become mini-bubbles. Instead, plodding growth, dividends and total return are the main areas of focus.

I have discussed the most famous of these low volatility ETPs, the PowerShares S&P 500 Low Volatility Portfolio (SPLV) in a number of different contexts in this space, including:

This time around my intent is to let the graphics speak for themselves, so without further ado, I give you three snapshots of the performance of SPLV against the performance against its more volatile sibling, the PowerShares S&P 500 High Beta Portfolio (SPHB).

SPLV vs. SPHB since inception (472 days):

[source(s): StockCharts.com]

SPLV vs. SPHB over the last 380 days:

[source(s): StockCharts.com]

SPLV vs. SPHB over the last 200 days:

[source(s): StockCharts.com]

I realize that every historical period in the financial markets is unique and that one can cherry pick graphics to make any imaginable point, but I think the three charts above tell almost the full story, which is this:

1.  Over the long-term, low volatility stocks have a high probability of outperforming high volatility stocks on an absolute basis and particularly on a risk-adjusted basis

2.  Even in bull markets, the total return approach of low volatility stocks often makes them comparable to or even superior to high volatility stocks

3.  The biggest risk associated with a low volatility approach is being left behind in a sharp bull move, when more defensive sectors can underperform substantially

The real question to ask yourself is which risk concerns you the most: a large drawdown or missing out on a large chunk of a bull rally?

Related posts:
Disclosure(s): none

blog comments powered by Disqus
DISCLAIMER: "VIX®" is a trademark of Chicago Board Options Exchange, Incorporated. Chicago Board Options Exchange, Incorporated is not affiliated with this website or this website's owner's or operators. CBOE assumes no responsibility for the accuracy or completeness or any other aspect of any content posted on this website by its operator or any third party. All content on this site is provided for informational and entertainment purposes only and is not intended as advice to buy or sell any securities. Stocks are difficult to trade; options are even harder. When it comes to VIX derivatives, don't fall into the trap of thinking that just because you can ride a horse, you can ride an alligator. Please do your own homework and accept full responsibility for any investment decisions you make. No content on this site can be used for commercial purposes without the prior written permission of the author. Copyright © 2007-2023 Bill Luby. All rights reserved.
 
Web Analytics