An MSCI study argues the low-volatility trade is a long way off from being a crowded one and says scalability isn't an issue, but the report, says Brendan Conway, didn't examine the market impact - i.e., the real world friction a large money manager might see moving in and out of positions.
Then there's valuations - the study found low-volatility stocks had an average P-E ratio of 18.1x vs. 19.5x for all stocks from 1992-2012. But now the stocks making up the iShares MSCI USA Minimum Volatility ETF (USMV) trade at 18.5x earnings vs. the S&P 500 at 16.5x. Globally, it's similar, with the iShares MSCI All Country World Minimum Volatility ETF (ACWV) at 18.5x earnings vs. the MSCI ACWI ETF (ACWI) at just 16.5x.
"[O]ver the past 10 years, the cheapness or 'valueness' of developed market low volatility stocks seems to have diminished. As of May 1, 2013, the earnings yield and B/P ratio data indicate that low volatility strategies have become more expensive than the market cap-weighted core indices," says Research Affiliates' FeiFei Li.