How volatile is your ETF?

Recent turbulence in ETFs tracking “low volatility” highlights just how important it is to keep an eye on what’s actually going in your funds. john Stepek explains how to make sure you know what's in yours.

Research shows that certain traits ("factors") can lead stocks to outperform the market over the long run. "Smart beta" (see below) exchange-traded funds (ETFs) aim to exploit this. They've proved popular with investors, who see them as a logical advance on index trackers (why track the benchmark when you can build a better index)? Yet recent turbulence in ETFs tracking one factor "low volatility" (also known as low vol or minimum volatility) highlights just how important it is to keep an eye on what's actually going in your funds.

The idea behind low-vol investing is to buy stocks that suffer from fewer ups and downs than the wider market. The benefit is that when markets are going up, you miss out a little bit, but when they fall, you avoid a lot of the worst of the slide. In other words, you make "superior risk-adjusted returns". Sounds good. There's just one problem: they may not always do what you expect.

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John Stepek

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.