Aurinia Pharmaceuticals (AUPH) is a clinical stage biopharmaceutical company focused on developing a...
Risk Averse? Go for Low Volatility
09/18/2015 9:00 am EST
According to Sam Stovall, US equity strategist for S&P Capital IQ, since December 1990 the S&P 500 High Beta index has declined on average 1.1% in the fourth calendar quarter, after rising 8.6% in the third quarter.
Meanwhile, the S&P 500 Low Volatility index was up on average 4.6% in the fourth quarter after a 2.0% increase in the third quarter. Stovall reminds us that history should be a guide but is not gospel.
Through May 1, the High Beta index was the better place to invest, rising 2.9% and outperforming the Low Volatility index, which declined 3.0% over the same period.
However, as the old adage “sell in May” suggests, the High Beta index has corrected 15% from May through August.
However, not all S&P 500 index constituents have performed the same. Indeed, during the same period, the Low Volatility index was down 2.0%.
The PowerShares S&P 500 High Beta ETF (SPHB) seeks to track a subset of the S&P 500 (SPX) index. It holds the 100 most volatile stocks and rebalances and sometimes incorporates new holdings on a quarterly basis.
On the other hand, the PowerShares S&P 500 Low Volatility (SPLV) holds the 100 least volatile stocks and also rebalances.
Relative to the S&P 500 index, financials (36% versus 17%) and consumer staples (21% versus 10%) are heavily weighted, while consumer discretionary is only 6.5%, with no energy exposure.
The ETF ranks favorably from an S&P Capital IQ Quality Ranking perspective.
For low volatility, SPLV is not the only choice and has actually been out of favor these past months.
Exposure to financials (18% of assets), consumer staples (14%), and consumer discretionary (8%) are closer to the S&P 500 index, as USMV has sector constraints relative to the diversified MSCI index.
USMV also earns a favorable ranking input for Quality Rankings. While the recent trend has been toward a low volatility approach, history suggests that it could soon reverse.
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