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- In a recent series of articles, I showed readers five strategies that have outperformed the market over trailing twenty year time periods.
- Funds that track low-volatility indices were shown to produce higher risk-adjusted returns. This article addresses the performance of low volatility strategies in bull markets where they are expected to lag.
- High beta stocks outperform early in economic recoveries, but the bounce is difficult to time. I propose a momentum strategy that switches between high beta and low volatility stocks.
- Investors should understand simple and easy-to-implement strategies that have been shown to outperform the market over long time intervals.
- The third of five strategies I will describe in a series of articles is the "low volatility factor" that has seen these stocks outperform over time.
- The Low Volatility Anomaly runs counter to how many investors see the world, but is supported by academic research and could be a successful holding for long-term investors.
Large Cap Low Volatility ETFs Deliver On Objective But Achieve Unexpected Returns
- Low volatility ETFs have begun gaining interest from investors seeking to limit overall portfolio risk while maintaining broad stock market exposure.
- The PowerShares S&P 500 Low Volatility Portfolio ETF is currently the largest with $4.5B in assets under management.
- An examination of betas and standard deviations of returns shows that the ETF is successfully delivering on its objective.
- In a somewhat surprising result, the ETF's returns have managed to top those of the S&P 500 with exposing shareholders to a much lower level of risk.
- The ETF currently pays a dividend yield of 2.4% beating the S&P 500's yield of 1.9%.
Should You Turn To Low-Volatility ETFs During Market Uncertainty? Part 1
- The S&P 500 closed out the year with 31.8% gain and economic reports signaled that the economic recovery was taking hold.
- As the bull market nears its 5th year, history says we could be experiencing a significant correction sometime in the near future.
- Long-term investors have some relatively new options at their disposal in the form of low-volatility ETFs.
- These funds help curb volatility risk and maintain equity market exposure relatively cheaply.
Low-Volatility ETF Doubles S&P 500 Risk-Adjusted Return
The Surprising 'Growthy-Ness' Of A Breakthrough ETF
Spotlight On PowerShares S&P 500 Low Volatility ETFTom Lydon • Sep. 1, 2011
Thu, Jul. 31, 11:04 AM
- The Compass EMP U.S. Discovery 500 Enhanced Volatility Weighted Fund (Pending:CSF) will include only companies with consistent positive earnings (at least its 4 most recent quarters) and is weighted based on the volatility of each stock.
- According to a regulatory filing, stocks with lower volatility receive a higher weighting, while stocks with higher volatility will receive a lower weighting in the fund.
- Earlier this month, Compass EMP launched its first three ETFs, all of which feature a volatility-targeting strategy and fall into the trendy "smart beta” umbrella.
- U.S. ETFs with a focus on volatility management: SPLV, USMV, XMLV, XSLV, SMLV, LGLV, CFA, CFO, CDC, CFA, CFO
Tue, Jul. 8, 12:26 PM
- Leading this week's decline are a lot of the same names which led March's "momo" selloff, among them the biotechs (XBI -4.5%) and social media (SOCL -4.4%). Also familiar, small caps (IWM -1.5%) are off more than the other major indexes.
- Doing their jobs are the low volatility ETFs like SPLV (SPLV) and USMV (USMV -0.2%), as well as defensive sectors like the utilities (XLU +0.6%).
- Raymond James' typically bullish Jeffrey Saut is out with a note calling for the first decent pullback of the year - a 10-12% decline - to commence later this month or early August, and he suggests investors begin raising cash.
- Biotech ETFs: XBI, BBH, FBT, PBE
- Low-vol ETFs: SPLV, LGLV, CFA, CFO
- Utility ETFs: XLU, IDU, VPU, UPW, FUTY, RYU, FXU, PUI, SDP, PSCU
Tue, Jul. 1, 12:40 PM
- Traditionally a mutual fund issuer, Compass EMP is striking out into the ETF industry with the creation of 3 smart beta funds, each tracking an index made by Compass EMP.
- The Compass EMP U.S. EQ Income 100 Enhanced Volatility Weighted Fund (CDC), Compass EMP U.S. 500 Volatility Weighted Index ETF (CFA), and Compass EMP U.S. 500 Enhanced Volatility Weighted Index ETF (CFO) will all begin trading on July 2nd.
- These funds all feature a focus on volatility management and will charge an expense ratio between 58 and 68 basis points.
- U.S. ETFs with a focus on volatility: SPLV, LGLV, USMV, VQT, PHDG, XSLV, SPXH, XMLV, SMLV, ERW, VIXH
Wed, Jun. 4, 12:49 PM
- The iShares MSCI ex-Japan Minimum Volatility ETF (AXJV), the iShares MSCI Europe Minimum Volatility ETF (EUMV), and the iShares MSCI Japan Minimum Volatility ETF (JPMV) will launch on June 5th .
- The three new offerings will offer "min vol" fans global exposure and join BlackRock's existing minimum volatility offering, the USA Minimum Volatility ETF (USMV).
- Other low volatility ETFs: SPLV, EEMV, USMV, EFAV, HILO, ACWV, EELV, IDLV, XSLV, XMLV, SMLV, LGLV
Tue, Jun. 3, 3:23 PM
- The three new offerings will offer "min vol" fans global exposure with the iShares MSCI ex-Japan Minimum Volatility ETF, the iShares MSCI Europe Minimum Volatility ETF, and the iShares MSCI Japan Minimum Volatility ETF.
- BlackRock's existing minimum volatility offerings include the USA Minimum Volatility ETF (USMV).
- ETFs: SPLV, USMV, EFAV, ACWV, IDLV, XSLV, XMLV, SMLV, LGLV
Thu, May. 1, 11:49 AM
- In response to dwindling revenues from patent expirations, drug companies are aggressively raising prices on their branded offerings. According to the IMS Institute for Healthcare Informatics, $20B of the pharmaceutical industry's 2013 sales growth was due to price increases. This perfectly offset the $19.3B in revenue declines.
- Since 2007, the CPI has risen 12% while some drug prices have inflated as much as 400%.
- Therapies that cost $300K or more are becoming more common in light of the incentives afforded by the Orphan Drug Act.
- Generics comprise 86% of all prescriptions filled but American spent $263B for medicines in 2012, up 11% from 2007's $236B.
- Unsurprisingly, industry representatives insist that the proper focus should be on outcomes instead of prices. They also cite the ever-rising cost of R&D.
- ETFs: SPY, QQQ, SH, DIA, IYH, SSO, SDS, XLV, PSQ, VOO, IVV, SPXU, UPRO, VHT, SPLV, TQQQ, SPXL, QID
Thu, May. 1, 11:18 AM
- If Pfizer is successful in acquiring U.K.-based AstraZeneca, its plan to redomicile there will save it millions in corporate taxes. The tax arbitrage scheme, called an inversion, creates a holding company in the foreign country with the lower tax rate. Britain's corporate tax rate is 21% (20% next year) which is substantially lower than the U.S.'s top rate of 35% (up to 40% when state and local taxes are included).
- About 24 U.S. companies have employed this strategy since 2008. Ireland, Canada, Switzerland and the Netherlands are also popular destinations for redomiciling.
- According to Reuters, many of the m&a deals this year have been driven, at least in part, by tax inversions.
- Predictably, investment bankers are working feverishly to generate deals in various industries that take advantage of the loophole before Congress acts to close it.
- Some lawmakers say that the best solution is to reform the U.S. business tax code.
- ETFs: SPY, QQQ, SH, DIA, SSO, SDS, PSQ, VOO, IVV, SPXU, UPRO, SPLV, TQQQ, SPXL, QID, PRF, SPXS, RSP, SQQQ, DOG, QLD, DXD, RWL, EPS, UDOW, SDOW, USMV, DDM, VV, SCHX, IWB, OEF, SPHB, NY, MGC, BXUB, QQEW, QQQE, VONE, FEX, JKD, XLG, TRND, SFLA, EQL, QQXT, SPLX, BXUC, ROLA, BXDB, EEH, TNDQ, SPXH, ONEK, IWL, TRSK, PXLC, EWRI, ERW, FWDD, LGLV, FMK, ALTL, SYE
Tue, Apr. 29, 8:05 AM
- If Pfizer (PFE) is successful in its plan to acquire AstraZeneca (AZN) and redomicile in the U.K., it will join a growing list of other U.S. firms who have executed similar transactions in order to lower their tax bills.
- Members of Congress say that the moves are symptomatic of the need to revamp the U.S. tax code.
- The U.K. corporate tax rate is 21% compared to the top U.S. rate of 35%. American firms must also pay taxes when they repatriate foreign profits after receiving credits for foreign taxes. This is why the ex-U.S. corporate cash horde is so large.
- Pfizer's 2013 tax rate was 27%.
- ETFs: SPY, QQQ, SH, DIA, SSO, SDS, PSQ, VOO, IVV, SPXU, UPRO, SPLV, TQQQ, SPXL, QID, PRF, SPXS, RSP, SQQQ, DOG, QLD, DXD, RWL, EPS, UDOW, SDOW, USMV, DDM, VV, SCHX, IWB, OEF, SPHB, NY, MGC, BXUB, QQEW, QQQE, VONE, FEX, JKD, XLG, TRND, SFLA, EQL, QQXT, BXUC, SPLX, ROLA, BXDB, EEH, TNDQ, SPXH, ONEK, IWL, TRSK, PXLC, EWRI, ERW, FWDD, LGLV, FMK, ALTL, SYE
Tue, Feb. 11, 10:07 AM
- Making the rounds on trading desks is this chart of the DJIA (DIA) of the last 18 months superimposed on a chart of the index during the same time frame in 1928-1929. The short version: If form holds, the market is set for another epic crash.
- In the more nuanced version, the chart says little except for again proving the hardwired tendency of the human brain to see patterns where none exist, and one is reminded of similar exercises over the past few years making the case for the Dow breaching its financial crisis lows.
- Technical guru Tom DeMark, however, is starting to believe: “Originally, I drew [the chart] for entertainment purposes only ... Now it’s evolved into something more serious.”
- Tom McClellan: "There is no guarantee that the market has to continue following through with every step of the 1929 pattern. But between now and May 2014, there is plenty of reason for caution.”
- Large-cap ETFs: SPY, QQQ, SH, DIA, SSO, SDS, PSQ, IVV, SPXU, UPRO, VOO, SPLV, TQQQ, QID, PRF, SPXL, SPXS, RSP, DOG, SQQQ, QLD, DXD, RWL, EPS, UDOW, SDOW, USMV, DDM, VV, SCHX, IWB, NY, SPHB, BXUB, QQEW, QQQE, JKD, FEX, VONE, TRND, SFLA, EQL, BXUC, ROLA, QQXT, BXDB, EEH, ONEK, SPXH, TRSK, FWDD, EWRI, TNDQ, PXLC, LGLV, ALTL, SYE
Wed, Jan. 8, 10:34 AM
- "The Safety Bubble Deflates," goes the title of a new report from Bernstein's Seth Masters, adding his name to those voices suggesting "safe" assets have become otherwise.
- Even though utilities, telecom, and consumer staples have underperformed of late, says Masters, their relative valuations are still well above the average over the last 50 years. "In periods of stress, investors tend to prize stability and safety too much. But in time, investors discover that every investment carries with it some degree of risk: if not risk of loss, then risk of inadequate growth."
- Related ETFs: XLU, IDU, VPU, NLR, GRID, JXI, NUCL, DBU, IPU, RYU, PUI, UPW, FXU, SDP, PSCU, AXUT, FUTY, UTLT, XLP, VDC, FXG, RHS, FSTA, PSL, PSCC, IYZ, VOX, IXP, IST, XTL, LTL, FCOM, TLL, AXTE
- Barron's Jack Hough says the "low beta" approach is a flawed one: First, volatility can change quickly as companies' or industries' fortunes shift; Second, beta tells one nothing about whether a stock's valuation is high or low. In a similar warning over low volatility stocks, BAML suggests looking for companies with smooth earnings rather than smooth stock prices. Screening for such, Hough finds CSX Corp (CSX -0.6%), DuPont (DD +0.6%), Cisco (CSCO -0.6%), and Halliburton (HAL -0.8%).
- Low volatility ETFs: SPLV, USMV, ACWV
Mon, Jan. 6, 3:52 PM
- "The low beta bubble is on the verge of deflating," says the quant team at BAML. "Due to low beta stocks’ strong performance in an up market, these stocks have quietly become riskier than they appear."
- Looking at the relative valuations of the "low beta" vs. "high beta" names, the analysts find the staid stocks trading at their largest premium to the risky ones in more than a decade.
- Low volatility ETFs: SPLV, USMV
Dec. 23, 2013, 11:57 AM
- "If history provides any guidance, there will be a shift to more cyclical, higher beta names, before this rally is well and truly over," says Niels Jensen of Absolute Return Partners, noting investors are buying in a "cowardly" fashion - focusing on defensive, low beta stocks.
- The trend can be seen in low volatility stocks - and the ETFs built to own them, SPLV and USMV - trading at P/E multiple premiums to the broader market, while a high beta portfolio like SPHB is at a discount.
Dec. 11, 2013, 1:26 PM
- 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.
- Related: SPLV
Dec. 5, 2013, 11:16 AM
- A "public service" from John Hussman who presents this long-term chart of the S&P 500 (SPY -0.3%) matched against occasions when the Investors Intelligence poll registered Bears at less than 18.5%, the Shiller P/E ratio stood above 19, and the S&P 500 was at a 5-year high: 1973, 1987, 2007, and today.
- Index ETFs: SPY, QQQ, IVE, SH, DIA, SSO, SDS, PSQ, IVV, SPXU, UPRO, SPLV, VOO, QID, PRF, SPXS, SPXL, TQQQ, DOG, RSP, SQQQ, SKF, DXD, QLD, IWF, RWL, EPS, IWD, UDOW, SDOW, DDM, IVW, VV, SPYG, SCHX, IWB, RPG, SPHB, NY, SPYV, BXUB, RPV, VOOG, QQEW, QQQE, JKD, VONE, FEX, VOOV, TRND, EQL, ROLA, SFLA, FBG, BXUC, UKF, FTA, QQXT, ONEK, EEH, SPXH, TRSK, BXDB, UVG, EWRI, PXLC, VONG, VONV, FWDD, TNDQ, LGLV, ALTL, SJF, FIBG
Nov. 26, 2013, 11:07 AM
- It's the bull market everyone continues to hate ... BAML's sell-side indicator - a contrarian take based on attitudes of strategists - continues to read in extreme bearish territory, suggesting more gains ahead for stocks. The level of bearishness now is actually greater than that of the March 2009 market bottom.
- Large cap ETFs: SPY, QQQ, SH, DIA, SSO, SDS, PSQ, IVV, SPXU, UPRO, SPLV, VOO, QID, PRF, SPXS, SPXL, TQQQ, DOG, RSP, SQQQ, DXD, QLD, RWL, EPS, UDOW, SDOW, DDM, VV, SCHX, IWB, SPHB, NY, BXUB, QQEW, QQQE, JKD, VONE, EQL, TRND, ROLA, SFLA, BXUC, QQXT, EEH, ONEK, TRSK, SPXH, BXDB, PXLC, FSU, FSE, EWRI, TNDQ, FWDD, LGLV, ALTL
Nov. 23, 2013, 2:53 PM
- As the taper approaches, it may be time to ring the register and book some gains, Barron's thinks. Add in the fact that the S&P's 26% YTD gain has "likely [left] many investors with a higher mix of stocks than they would prefer," and the issues isn't whether or not to sell, but rather "what to sell and where to put the cash."
- Food for thought from Jack Hough: "The S&P 500 trades above 17 times trailing earnings, versus a historical average of about 15 [and] U.S. shares are 57% more expensive than emerging markets and 67% more expensive than Europe" based on "a long-term average of earnings to adjust for cyclicality."
- Investors might want to consider putting small companies on the chopping block first, as they have outperformed their larger cap counterparts this year and their P/E premium to large caps has stretched well beyond its historical average.
- Small/Micro Cap ETFs: IWM, TZA, TNA, IWC, UWM, VB, IJR, SLY, RWJ, URTY, TWM, SCHA, RWM, SRTY, SAA, DWAS, VTWO, SBB, SDD, RSCO, JKJ, FDM, PZI, XSLV, WMCR, FYX, VIOO, EWRS, TWOK, SMLV, PXSC
- Large Cap U.S. ETFs: SPY, QQQ, SH, DIA, SSO, SDS, PSQ, IVV, SPXU, UPRO, SPLV, VOO, QID, PRF, SPXS, SPXL, TQQQ, DOG, RSP, SQQQ, DXD, QLD, RWL, EPS, UDOW, SDOW, DDM, VV, SCHX, IWB, SPHB, NY, BXUB, QQEW, QQQE, JKD, VONE, EQL, TRND, ROLA, SFLA, BXUC, QQXT, EEH, ONEK, SPXH, TRSK, BXDB, PXLC, FSU, FSE, EWRI, FWDD, TNDQ, LGLV, ALTL
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