Lower Volatility Smart Beta Funds – A Safe Haven in Turbulent Times? Part 2 of a Series on Multifactor Smart Beta ETFs
In this post we take a closer look at an important building block of many multi-factor portfolios, low volatility. Low volatility funds seek to take advantage of the “low volatility anomaly” – the empirical observation that lower risk, securities outperform their higher volatility counterparts.
Smart Beta funds are hot. According to ETF.com, more than half of the 150 funds launched in 2016 implemented smart beta strategies. For the year to June 30, 2016, ETFGI’s most recent data show that assets in smart beta funds have a five-year annual compound growth rate of 31.3 percent. And, low volatility funds, up $15.1 billion in the first seven months of the year are the most popular. BlackRock’s Holly Framsted called minimum volatility funds the “fastest growing” smart beta segment. In this report we examine the sector and factor exposure of a low volatility index to see how the strategy may fare if volatility increases.
In our earlier post on multi-factor smart beta products we noted the difficulty in assessing performance, partially because we don’t have clear expectations about how these funds should behave. We noted earlier that some funds which target the exact same factors perform quite differently.
In this post we take a closer look at an important building block of many multi-factor portfolios, low volatility. Critics have cautioned against low volatility strategies citing sector concentration, rate sensitivity and potential crowding risks. Anticipated rate rises, currently, may be contributing to withdrawals from low volatility funds after a long period of inflows.
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