Swedroe: New Findings on the Low-Risk Anomaly

New research on the low-risk anomaly—in which less risky stocks earn higher risk-adjusted returns—shows “exactly which types of stocks are likely to perform poorly over time, especially in a bear market.” This according to an article in Advisor Perspectives by Larry Swedroe, director of research for the BAM Alliance. The article offers a summary of the study results, which were published in the June 2019 issue of the Journal of Financial and Quantitative Analysis: “It… Read More

Long Term Compounding Using Low Volatility & Other Fundamental Factors

By Justin J. Carbonneau (@jjcarbonneau) —  There is an age-old concept in investing that the more risk you take the higher the return you should get. This makes a lot of sense; investors don’t invest in a risky companies to get low returns. Most hope to be compensated for that extra risk. But the tradeoff of risk and return is flipped upside down when talking about the most and least volatile stocks in the equity… Read More

Low-Volatility Stocks May Have a Dark Side

Although low-volatility stocks were very appealing in the wake of the financial crisis (assets under management have risen to approximately $46 billion since then), some argue that these stocks are “effectively bond proxies that have benefited from the declining interest rates over the last few decades.” This according to an article in CFA Institute. Do rising rates present a risk to this asset class? CFA Institute attempted to find out by creating a long-only portfolio… Read More

Boring Stocks are Winning

For emerging-market and European equity investors, low-volatility stocks are “paying off by the most in two years,” according to a recent Bloomberg article. “Low volatility—sorting stocks based on the magnitude of price swings—tends to beat the market over time,” the article states. “The factor’s performance in the U.S. has lagged lately, but calm stocks elsewhere have picked up the slack.”

The Most Expensive Investing Factor

By Jack Forehand, CFA (@practicalquant) —  Factor investing is a long-term pursuit. Successfully following a factor-based approach is a function of studying what works over time, implementing it in a disciplined way, and then staying the course through what will inevitably be long periods of underperformance to achieve your long-term goals. Because factors can move in and out of favor for extended periods of time, implementing timing strategies to move in and out of factors… Read More

Interest Rate Sensitivity and Low-Vol Investing

Interest rates have a significant impact on security prices, according to an article by Morningstar’s Alex Bryan, CFA, the firm’s Director of Passive Strategies Research, North America. Bryan writes that, unlike bonds, which have a finite life and fixed cash flow, the impact of rates is more difficult to anticipate for equities. He explains his theory that firms that are “more sensitive to the business cycle tend to experience greater cash flow growth during economic… Read More

What Rising Rates Mean to Low-Vol Investors

“Confusing risk with volatility can be dangerous,” says a recent report by Greenline Partners, as it “can lead to seeing things that do not exist.” This according to an article published this past May in Chief Investment Officer. Greenline, the article states, found that low-vol strategies outperformed the index by nearly 1%-2% annually over the last 50 years, but two-thirds of this period coincided with falling rates. A recent report published by the asset management… Read More

The Irony of the Low-Volatility Binge

Investor appetite for low-volatility mutual and exchange-traded funds isn’t new. However, it seems to be reaching the point of gluttony. Bloomberg reports that this month, (for the first time), combined assets in the PowerShares S&P Low Volatility fund and the iShares Edge MSCI Minimum Volatility USA ETF reached $20 billion. But as investors continue to flee the rest of the equity markets (yanking almost $60 billion from U.S. stock funds this year alone), the mass inflow to the low-vol funds is making the shares in those… Read More

Popularity and Price Increase for “Low Vol” Funds

“Low volatility” funds have surged in popularity recently as investors have poured nearly $10 billion into them so far in 2016, which has significantly increased their price. At the end of 2015, one such “low vol” fund (i.e., specializing in stocks that fluctuate less than the broader market) had a P/E ratio just above the market as a whole. By the end of April 2016, it was “nearly 10% more expensive than the market average,”… Read More