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Low Volatility Funds Are Tested: We Have A (Surprise) Winner

Apr. 11, 2018 1:58 AM ETAUENX, FDLO, LGLV, SMLV, SPLV, USMV, XMLV49 Comments
Left Banker profile picture
Left Banker


  • Low volatility for 2017 has been followed by high volatility in 2018.
  • Low-volatility funds are among the most popular of the "smart beta" offerings on the market.
  • The markedly different volatility periods give us a chance to compare how the low-volatility funds compare over different market conditions. I look at domestic large-, mid- and small-cap offerings.
  • One fund emerges as a clear winner in the large-cap category. It's not one many would have expected to do so.
  • Mid-cap and small-cap categories offer quite different results.

Low Volatility Funds Are Tested And We Have a (Surprise) Winner


As we all know, that one word covers the huge change in market action from 2017 to 2018. Moderate levels of volatility in 2016 were followed by 2017’s exceptionally low volatility. In 2018 we’ve seen a turn to much higher volatility.

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Over the last few years, factor investing has become increasingly trendy, and one of the cornerstones of factor investing is the low-volatility factor. It has been widely documented that the low-volatility premium has been a clear generator of alpha. Factor-based or so-called smart-beta funds hit the market as fund sponsors moved to meet investor demand for the category. Low-volatility ETFs are a prominent example.

The marked shift in volatility gives us an opportunity to ask how well the low-volatility funds have performed in both a low-volatility environment (2017) and its extreme opposite (2018 YTD). With this article I’d like to approach this question for domestic funds. As it happens, I’m writing this in-flight using data I downloaded over the past weekend, so the results I’ll be discussing are current through Friday, April 6’s close. Some of the performance data cover through the close of 2018’s first quarter.

The funds I’ll be looking at include several large-cap ETFs, one mid-cap ETF, and two small-cap ETFs . I’ve also added an open-end mutual fund that is not explicitly a low-volatility fund but one that takes a low-volatility stance to achieve a defensive market positioning. I’ve written about this fund previously (here) and felt it fit this category well enough to include here.

Eight Low-Volatility Funds


AQR Large Cap Defensive Style N (AUENX)

Fidelity Low Volatility Factor ETF (FDLO)

iShares Edge MSCI Min Vol USA ET (USMV)

PowerShares S&P 500 Low Volatility Portfolio (SPLV)

SPDR Russell 1000 Low

This article was written by

Left Banker profile picture
I'm a retired individual investor.

Analyst’s Disclosure: I am/we are long AuENX FDLO USMV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am not an investment professional and nothing I write here should be taken as professional advice. Everyone's personal situation is unique. It is the role of finance professionals to provide advice in the contexts of an individual's personal situation. What may be right for my investment goals and risk tolerances may well be quite wrong for someone else. Do your own due diligence. Consult with professionals on your own needs, objectives and tax circumstances before you invest. I do not give advice and ask that readers refrain from asking for it.

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