Advertisement

Low volatility

Low volatility – or “low vol” – investing means buying shares (or bonds) that tend to go up or down in price by less than the overall market (in other words, they’re less volatile).

Low volatility or "low vol" investing means buying shares (or bonds) that tend to go up or down in price by less than the overall market (in other words, they're less volatile).

In theory, low-volatility assets should deliver lower returns than highly volatile ones, because investors are supposed to demand extra rewards for taking extra risks. Yet in fact, studies show that low-vol stocks beat their higher-volatility peers over time. As a result, low vol has been marketed as a "factor" alongside value, small-cap and momentum investing that can help investors to beat markets over the long run.

Advertisement - Article continues below

Low vol has grown particularly popular in the wake of the 2008 financial crisis, after which the idea of being able to invest in "low-risk" assets and still beat the market became understandably attractive to jittery investors. The PowerShares S&P 500 Low Volatility exchange-traded fund now holds more than $7.4bn in assets under management, for example. As a result, some argue that the factor may no longer be as effective in the future.

For example, Larry Swedroe has argued on ETF.com that one reason for low vol's outperformance is that, historically, low vol stocks have also been value stocks they've been cheap. Given the amount of money that has been drawn to the sector, that's no longer the case so it's possible that low vol will not outperform in the future.

Another concern about today's particularly calm investment environment is that many wider investment strategies now depend on volatility remaining low and falling in effect, many investors are "short volatility", whether they fully realise it or not. As a result, if volatility generally does pick up, then it could expose unexpected frailties in financial markets..

Advertisement
Advertisement

Recommended

Visit/glossary/bonds
Glossary

Bonds

A bond is a type of IOU issued by a government, local authority or company to raise money.
19 May 2020
Visit/spending-it/glossary/601300/quantitative-investing
Glossary

Quantitative investing

Quantitative investing uses sophisticated computer-based mathematical models to identify and carry out trades.
8 May 2020
Visit/glossary/quantitative-easing-qe
Glossary

Quantitative easing (QE)

Quantitative easing (QE) involves electronically expanding a central bank's balance sheet.
8 May 2020
Visit/glossary/600702/emerging-markets
Glossary

Emerging markets

An emerging market is an economy that is becoming wealthier and more advanced, but is not yet classed as "developed".
24 Jan 2020

Most Popular

Visit/investments/commodities/industrial-metals/601401/money-printing-infrastructure-base-metals-copper
Industrial metals

Governments’ money-printing mania bodes well for base metals

Money is being printed like there is no tomorrow. Much of it will be used to pay for infrastructure projects – and that will be good for metals, says …
27 May 2020
Visit/economy/eu-economy/601422/heres-why-investors-should-care-about-the-eus-plan-to-tackle-covid-19
EU Economy

Here’s why investors should care about the EU’s plan to tackle Covid-19

The EU's €750bn rescue package makes a break-up of the eurozone much less likely. John Stepek explains why the scheme is such a big deal, and what it …
28 May 2020
Visit/investments/funds/601385/in-support-of-active-fund-management
Funds

In support of active fund management

We’re fans of passive investing here at MoneyWeek. But active fund management has its place too, says Merryn Somerset Webb.
25 May 2020