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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 1 Investments