Shocking title from me. Morningstar had an article I found on Seeking Alpha extolling the virtue of what it calls boring investing with low volatility ETFs. It believes the best of these is the PowerShares S&P 500 Low Volatility ETF (SPLV)I've been writing about this for a long time with at least two different phrases; smoothing out the ride and John Serappere's 75/50 concept which targets 75% of the market's upside and 50% of its downside.
Last year was a great year for the low volatility strategy. The market was flat, financials got crushed and since that sector is almost zeroed out in SPLV the fund outperformed SPY by about 11 percentage points in 2011 (note SPLV came out in May so only seven months) which is a significant beat.
This year paints a different picture as financials have been trading well. The Financial Sector SPDR (XLF) is up over 12% YTD, the SPX is up over 8% and SPLV is flat which is a significant lag for less than two months. You can look under the hood for all the sector particulars but as is often the case some of last year's best areas are doing poorly this year and some of last year's stinkers are doing well. If risk is on then the low volatility ETFs should be expected to lag.The long term evidence on low volatility investing that each of the fund companies provides is very clear about the long term benefit of favoring this space but it should also be clear that in a year that is up a lot, low volatility investors will lag. This is not bad as one year means nothing in pursuit of having enough money when you need it other than to wear on someone's ability to be patient.
No strategy can be the best for all times. The next time the market is up 25% in a year low volatility investing will look lousy and the next time the market is flat or down low volatility investing will look fantastic. As always, long term investors need to be patient investors.
The first picture is from Arthur's Pass from Wednesday NZ time (Tuesday in the US). The second picture is the Whataroa FD fire station. The final picture was a coffee stand on the side of the road as we made our way to Mount Cook. The coffee culture has permeated New Zealand in a way that did not exist when we last visited in 2005. The Mount Cook area is socked in with weather but hopefully we will be able to see it today and get some pictures.
3 comments:
Thanks again for providing some pics of your trip. If I could travel, I too would stay off the beaten tourist path.
My understanding is that low vol/beta funds outperform on a risk-adjusted basis, but not on an absolute basis, even over the long term. I thought your article at thestreet.com, wherein you advocated using these funds as core holdings in a core and explore strategy, made a great deal of sense. Adding a little alpha when the market is rallying also keeps folks from bailing out of these funds at the wrong time, I would surmise.
glad the pictures are interesting
7:45,
Info from CBOE about buywrite and putwrite indexes says that they beat on an absolute basis too.
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