Low Volatility: Success or Failure?

One of the consequences of May’s shift in leadership of the U.S. equity market from defensive to cyclical sectors has been the underperformance of most (if not all) low volatility strategies. Does this mean, as some commentators have suggested (e.g. see http://www.indexuniverse.com/hot-topics/18860-when-low-volatilitty-bites-back.html?showall=&fullart=1&start=4), that low volatility strategies “failed?”

Making a judgment of success or failure, about low vol or any other investment strategy, requires us to identify the goal against which the strategy is to be evaluated. Otherwise said, she who would design strategy indices must decide, before she starts, how she’ll know she’s finished.

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In the case of low volatility indices, the objective is to deliver a pattern of returns similar to that of the parent index, attenuating both increases and decreases. Like this:
Low Vol and S&P 500

Over long periods of time, most low vol indices have outperformed their parents, as the graph above illustrates for the S&P 500. But their goal is not outperformance per se — their goal is, well, lower volatility. As long as they deliver against that objective, low volatility indices will be doing what they were designed to do.

The posts on this blog are opinions, not advice. Please read our disclaimers.

2 thoughts on “Low Volatility: Success or Failure?

  1. Pingback: Volatility: Love It or Leave It | S&P Dow Jones Indices

  2. Pingback: Beta, Smart and Dumb | S&P Dow Jones Indices

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