Low Volatility Investing: Meaning, What is it & Does It Work?

But it can be dangerous to equate «less» volatility with «low» volatility. The former is a more apt description and one that would better calibrate investors’ expectations. The latter better describes assets that would better diversify equity risk, like high-quality bonds.

  1. If an investor is buying a put option to speculate on a move lower in the underlying asset, the investor is bearish and wants prices to fall.
  2. These picks are representative of the approach of this low-volatility ETF, as it buys into large and entrenched companies with a strong history of dividends.
  3. The following stocks all sport low «beta» – a measurement of how volatile an investment is to a relevant benchmark.
  4. But it has still kept the pedal down on its payout every year since breaking off of Kraft.
  5. During these times, you should rebalance your portfolio to bring it back in line with your investing goals and match the level of risk you want.

Based on the definitions shared here, you might be thinking that volatility and risk are synonymous. Assessing the risk of any given path — and mapping out its more hair-raising switchbacks — is how we evaluate and measure volatility. Not surprisingly, volatility is often seen as a representative of risk in investments, with low volatility signaling safety and positive results, and high volatility indicating danger and negative consequences. This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial professional before making an investment decision.

How Is Market Volatility Measured?

The annual returns of this second company look very different from Company A’s, but the annual average return is the same. Both of these stocks have an average annual return of 7% despite the first company’s higher rate of volatility. Market volatility is defined https://g-markets.net/ as a statistical measure of a stock’s (or other asset’s) deviations from a set benchmark or its own average performance. Loosely translated, that means how likely there is to be a sudden swing or big change in the price of a stock or other financial asset.

For instance, if you’re aiming for emerging market stocks to be 10% of your portfolio, and after a big market swing, you discovered that emerging markets were more like 8% or 12% of your portfolio, you may want to tweak your holdings. During the bear market of 2020, for instance, you could have bought shares of an S&P 500 index fund for roughly a third of the price they were a month before after over a decade of consistent growth. By the end of the year, your investment would have been up about 65% from its low and 14% from the beginning of the year. As an investor, you should plan on seeing volatility of about 15% from average returns during a given year.

Is High or Low Volatility Better for Stocks?

It admittedly hasn’t held a candle to the market since then, performance-wise, with its 230% total return lagging the S&P 500 by 110 percentage points. Coca-Cola is also among the ranks of the Aristocrats, dropping larger payouts into investment accounts every year for more than six decades. Income investors will also love KO’s 3.1% yield, which is among the highest among these low-vol stocks and more than twice what the S&P 500 yields.

Another more tactical way to play low-volatility ETFs is to focus on the next tier of the market down from your usual blue chip stocks. That’s where the Invesco S&P MidCap Low Volatility ETF (XMLV, $52.35) comes in. This fund excludes the big guys and instead goes for the «goldilocks» mid-cap stocks that are not too big and not too small. Traders and investors tend to measure volatility using the VIX, which is an oscillator that measures market expectations for volatility in S&P 500 futures. A VIX reading below 12 is an indicator of low volatility, while readings of are normal, and above 20 show high volatility. But he remains positive on AIZ shares, rating them Outperform «as a strong rebound in Global Housing results and the reemergence of share buybacks should drive» earnings per share growth.

Because people tend to experience the pain of loss more acutely than the joy of gain, a volatile stock that moves up as often as it does down may still seem like an unnecessarily risky proposition. However, what seasoned traders know that the average person may not is that market volatility actually provides numerous money-making opportunities for the patient investor. Before diving deeper into the multi-factor strategy, it is important to understand the evolution of the implementation of factor strategies in passive investing.

How does low volatility investing work?

Exhibit 1 is a relative wealth chart that plots the growth of the MSCI USA Minimum Volatility Index divided by the growth of the Morningstar US Market Index. When the line slopes upward, the minimum-volatility index is outperforming the broad market index, and vice versa. The upward spikes coinciding with the bursting of the dot-com bubble, the global financial crisis, and the coronavirus pandemic are a testament to the strategy’s efficacy; it has taken some of the sting out of stock-market drawdowns. In terms of advantages, the index consists of only large-cap stocks which can be comforting to most investors. Two, since it invests only in large-cap stocks, there is low liquidity risk. And finally, it is a system so there are no biases in the selection of companies.

This means they can go long on the stock, or buy calls, as the price nears a low and then ride the upswing to sell at or near the high. As a standalone company, Mondelez has a relatively short dividend track record compared to these other low-volatility stocks. But it has still kept the pedal down on its payout every year since breaking off of Kraft. But no matter what the economy is doing, you need to brush your teeth, and you need to wipe your … well, you get where we’re going with this.

Coca-Cola’s back on the rebound, though, and looking for more ways to grow. And that growth is very likely to come not from the U.S. nor other developed countries, but emerging markets. Coca-Cola (KO, $60.16) is another Dividend Aristocrat from the consumer staples sector that manages to stay chill when the market sweats.

However, over the same 10-year period, the average difference between the one-year return of the S&P 500 Utilities and S&P 500 indices was also 10%. In other words, a stock being one of the best Utilities stocks may be less important than being a Utilities stock. During bull
markets, where the market is growing, a low volatility portfolio
will typically underperform compared to the general market.

Low Volatility? You Have Options

Those products – as well as foods, drinks, and a few other necessities – are consumer staples, and the companies that provide these products tend to be stable performers and offer higher-than-average dividends. Utility stocks have a reputation for being dependable low-volatility plays given the nature of their best trading journal business. Much like people need food and personal products (consumer staples) and prescriptions (healthcare), they also need electricity, gas and water – which are provided by utility companies. This list includes investable products traded on certain exchanges currently linked to this selection of indices.

While we have tried to include all such products, we do not guarantee the completeness or accuracy of such lists. Please refer to the disclaimers here for more information about S&P Dow Jones Indices’ relationship to such third party product offerings. In this paper, we examined the effectiveness of six well-known risk factors (size, value, low volatility, momentum, quality, and dividend) in the Chinese equity market and the behavior of these factors under different market regimes. In China, we observe increasing interest in factor-based investing in the equity market, although it lags the U.S. and some other Asian markets (like Japan). A proliferation of passive investment vehicles based on this concept attracted more than $70 billion in assets globally as of the end of February 2019. To better grasp this concept, let’s examine these imaginary companies again, assuming that you make a one-time investment of $1,000.

Market volatility is measured by finding the standard deviation of price changes over a period of time. The statistical concept of a standard deviation allows you to see how much something differs from an average value. In this case, the values of $1 to $10 are not randomly distributed on a bell curve; rather.

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