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Calm Down, Everyone: Low Volatility Investing Strategies Are Killing It

The once-enshrined investing maxim that there’s no high reward without high risk is getting a serious rethink these days from both finance academics and stock market investors. As I noted earlier this month, the conventional wisdom that volatility creates attractive investing opportunities isn’t always the case if you examine the historical data.

According to a  report (.pdf) by Wells Capital Management published last month, the market has seen long stretches-- between 1992 and 1996, or between 2003 and 2007—when stocks performed well yet volatility was relatively low. Right now, we are in one of these relative periods of calm:

^VIX Chart

^VIX data by YCharts

Back in 2011, Brendan Bradley of Acadian Asset Management, along with Harvard's Malcolm Baker and NYU's Jeffrey Wurgler, published a  widely cited study in the Financial Analysts Journal on the returns of low-volatility stocks. (Here’s a direct  link to the study.)

According to their research, the least-volatile quintile of the 1,000 biggest stocks in the U.S. returned 10.2% annually from 1968 to 2010. In contrast, the most-volatile quintile gained just 6.6%.

In October,  Tadas Viskanta at Abnormal Returns took note of the growing popularity of low volatility trading strategies and the 'low volatility anomaly' that seemed to be boosting their performance.

In a piece out today, Bloomberg points to the remarkable success of the PowerShares S&P 500 Low Volatility Portfolio (SPLV), which is designed for protection from stock market swings. Since its debut nearly two years ago (May 5, 2011), the exchange-traded fund has gained 30 percent vs. 21 percent for the S&P 500 Index. It has attracted $4.1 billion in assets.

SPLV Chart

SPLV data by YCharts

Of course, traders with a short-term horizon still love stocks that display big daily moves. And Bespoke Investment Group late month published this useful list of S&P 1500 with the biggest intra-day trading ranges so far in 2013. They include 3D Systems (DDD), JC Penney (JCP), Netflix (NFLX) and Geospace Technologies (GEOS).

If you are intrigued by volatility-based trading strategies, check out:
  • LakeView's High Dividend, Low Volatility model, which holds stocks and ETFs that produce above-market average dividends while exhibiting below-market average volatility. Its current indicative yield is 4.72% (as of 3/20/13, data from Bloomberg).
  • Robert Zingale’s Covestor Volatility Mean Reversion model. In his latest commentary, Robert outlines his trading strategy should the market become more choppy in the months ahead.

Photo: Gabriella Camerotti


The post Calm down, everyone: Low volatility investing strategies are killing it appeared first on Smarter Investing.

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