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TIPS FROM TODD – PORTFOLIO MANAGEMENT ADVICE
High returns, low volatility
For decades, low-volatility portfolios have outperformed high-volatility portfolios and
with less volatility. So if it works as prescribed, it can be a win-win for an investor’s longterm portfolio. By Todd James
In previous articles, we wrote about
indices outperform the market over
weights them according to the inverse
how important it is to manage risk
the long term, and with higher risk-
of their volatility, so that less volatile
within a portfolio.
adjusted returns.
stocks receive larger weightings.
In particular, when investing in hedge
One easy way for investors to take ad-
Yet low-volatility portfolios and ETFs
funds, we explained how lower volatil-
vantage of this anomaly is to invest in
don’t come without risks.
ity and uncorrelated assets add to the
low-volatility ETFs which do all the work
performance of a long-term portfolio.
for you, at a fraction of the cost of an
The portfolio itself, as you would prob-
actively-managed fund, or even as an
ably expect, invests more in defensive
One way to improve the risk-adjusted
alternative to buying expensive and less
sectors (compared with the benchmark)
return of a portfolio is to explore and
liquid hedge funds.
such as utilities, consumer staples and
then be able to extract value from
healthcare.
various market anomalies which have
Over the last five years, one of the
existed historically.
fastest-growing ETF categories has
SPLV invests approximately 53% of the
been low-volatility ETFs.
portfolio in these three sectors com-
Being a rational
pared with only 27% for the comparable
investor
Performance proof
There are anomalies that exist in invest-
In terms of performance, for example,
ing due to the irrational behaviour of
since inception (May 2011) the Power-
This sector concentration can lead to
market participants.
shares S&P 500 Low Volatility ETF
significant periods of underperfor-
(SPLV) has managed to produce a
mance, particularly during bull
One market anomaly, the low-volatility
13.51% annual return compared with
markets when defensive sectors are
or low-beta anomaly, provides historical
the S&P 500 index, which returned
out of favour.
evidence which highlights that a port-
11.71%.
folio of low-volatility stocks has pro-
S&P 500.
But the historical evidence is compel-
duced higher risk-adjusted returns than
Year-to-date in 2016, the SPLV ETF has
ling. For decades, low-volatility portfo-
portfolios with high-volatility stocks.
a total return of 8.24% compared with
lios have outperformed high-volatility
3.57% for the SPY ETF.
portfolios and with less volatility.
suggests that higher risk results in
SPLV passively holds the 100 stocks
So if it works as prescribed, it can be a
higher returns; however, according to
from the S&P 500 with the lowest vola-
win-win for an investor’s long-term
academic studies, low-volatility
tility over the past 12 months and
portfolio.
Generally-accepted portfolio theory
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Investments