Success from owning low volatility/dividend-centric funds comes from being able to think in terms of years, not months. If a low volatility fund is working properly, it is probably going up less than the market during the bull phase and going down less during the bear phase such that over the entire cycle it should outperform. Investors who do not realize this could end up becoming impatient during a rally, selling before the subsequent decline and missing out on the benefit that low volatility funds potentially offer.
When strategies like this get popular, the investment industry creates a lot of product which can saturate the market and lead to a mania that ends badly. Because of the broad based nature of the funds in the low volume/dividend-centric space, a bubble is not a realistic threat. The more likely threat from saturation is simple underperformance versus traditional market cap weighting.
Obviously, DIV is vulnerable an implosion in REITs or the other large niches in the fund but the fund would not be the cause of an implosion, merely a victim of it.
At the time of publication, the author had no position in any of the holdings mentioned.Follow @randomroger This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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