Low volatility funds live up to their name as market falls

But the category overall has seen lower returns this year.
MAY 18, 2017

Low-volatility funds largely lived up to their name in Wednesday's market carnage — but clients should be reminded that "low-vol" doesn't mean "no loss." As their category name implies, low-vol funds are designed to not bounce as high or fall as low as the general market — a comfort to those worried about big losses. The average low-vol ETF or fund fell 1.43% Wednesday, versus a 1.84% loss for the Standard & Poor's 500 stock index, according to preliminary data from Morningstar. The largest low-vol fund, the $12.6 billion iShares Edge MSCI Min Vol USA (USMV), fell 1.01%. (More: Markets fall in reaction to Trump turmoil) The funds' returns varied according to strategy and market capitalization. The top-performing low-volatility fund, Horizons USA Managed Risk ETF (USMR), slipped 0.8% during Wednesday's market rout. The fund chooses low-volatility stocks from the STOXX 900 Index, such as Southern Co., Costco and Clorox. Due to the popularity of low-volatility strategies, many of the fund's holdings have higher price-to-earnings ratios than the S&P 500. Costco, the fund's second-largest holding, sells for 31.2 times its past 12 months' earnings, versus about 19 for the S&P 500. Low-vol funds that fared worse than the S&P 500 generally invested in small- and mid-cap stocks, which typically fare worse in market downturns. The Russell 2000 small-cap index fell 2.78% Wednesday, for example, while the S&P 400 midcap index fell 2.07%. The worst-performing low-vol ETF, Deutsche X-trackers Russell 2000 Comprehensive Factor ETF (DESC), fell 2.64%. (More: Investors flee some low-volatility funds — possibly at worst time) Low volatility has translated into lower returns this year. The average low-vol fund has gained 3.93% this year, versus 6.12% for the S&P 500.

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