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Low Volatility Returns To The Limelight


Over the past 20 years, the S&P 500 averaged October gains of 2.20 percent, making it the best month of the year for the benchmark U.S. equity gauge. Even with that data point in its favor, October has a dubious reputation among equity investors.

After all, it is the month that saw the arrival of the 1929 market crash and the “Black Monday” slide in 1987. October 2018 probably will not wind up going down in ominous lore on par with 1929 and 1987, but during the first two weeks of the month, investors endured a significant uptick in volatility. Last week, the S&P 500 lost nearly 4 percent while falling below its 200-day moving average for the first time in 577 trading days.

As the chart below depicts, the S&P 500’s average intra-year drops can be large, but in the vast majority of years, the index is able to generate positive annual returns.

Significant equity market gyrations, particularly in short time frames, can draw attention to the low volatility factor, an investment factor accessible via numerous exchange traded funds including the JPMorgan U.S. Minimum Volatility ETF (JMIN).

The Right Time?

Timing individual investment factors, including low volatility, is not an easy task. For advisers and investors mulling low volatility strategies over the near-term, there are some important points to consider. First, low volatility stocks, historically, deliver better returns than more volatile counterparts over long holding periods. Second, low volatility funds can minimize downside exposure when equity markets retreat, as was the case for the week ending Oct. 12.

Yes, the low volatility factor has been negative to start October, and, no, 10 days does not confirm a trend. However, as the chart below indicates, the low volatility factor has been less bad than the previously high-flying growth and momentum factors, among others, since the start of October.


Another critical point regarding factor timing is that, from year-to-year, factor leadership can and does shift. While the leadership of growth and momentum has been persistent for several years, stocks’ rocky start to October could signal changes atop the factor leader board.

“The winners so far in October were the first three quarters’ laggards, with previously-high flying momentum and growth names falling behind,” said S&P Dow Jones Indices. “Will defensive factors assume market leadership while Momentum and Growth have a well-deserved respite?  Ten days do not a trend make, but what we see so far in October represents such a potential regime shift.”

JMIN’s Approach

The JPMorgan U.S. Minimum Volatility ETF (JMIN) follows the JP Morgan US Minimum Volatility Index. That benchmark “is comprised of US securities selected from the Russell 1000 Index and uses a rules-based factor selection process developed in conjunction with J.P. Morgan Asset Management. The index is designed to reflect a sub-set of US securities selected for their factor characteristics. The index seeks to deliver lower volatility while maintaining diversification across sectors and securities,” according to FTSE Russell.

JMIN’s sector attribution mitigates some of the risks associated with low volatility strategies.

“One frequent criticism is that low volatility stocks are bond proxies as these stocks tend to be stable businesses with significant amounts of leverage,” according to Factor Research.

While JMIN does have a 16.20 percent weight to the rate-sensitive utilities sector, its largest sector allocation is 20.10 percent to healthcare, a defensive sector that often performs well when interest rates rise.

Sector attribution is meaningful with low volatility strategies. As of Oct. 12, 2018, JMIN is up 1.55 percent year-to-date, while the S&P 500 Low Volatility Index, which is more heavily allocated to rate-sensitive sectors, is down 0.55 percent.

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