Carnegie Market Blog


The Sleeping Dog Has Woken

Posted by Brent Luce on Sep 9, 2016 4:47:25 PM

Low Volatility ETFs

As I have mentioned before, over the past couple of years, investors have flocked toward high-dividend paying stocks which are traditionally lower volatility stocks.  Many of these stocks have been driven to all-time high valuations and the investor base has changed in that many holders are now there just for the yield.  While these stocks have historically been lower volatility stocks, if interest rate expectations were to strongly reverse, it is quite possible that these allegedly safe stocks might in fact be more volatile than the market.  As part of the proliferations of indices (read last blog post about this), investors can now invest in a wide variety of themes, including so called low volatility ETFs which invest in stocks that have exhibited lower volatility than the market over the past year.  Today is the biggest down move since “Brexit”, and guess what?  The low volatility index is down MORE than the market as a whole.  I have not fully analyzed it, but my hunch is that the low volatility ETFs consist largely of dividend paying and therefore interest rate sensitive stocks.  The chart below supports this case, illuminating the underperformance of “low volatility” versus the general market since the recent low in interest rates.  This reminds me a bit of 2008 when investors trusted backward looking volatility data and were blind to the fact that certain correlations will change when market conditions change.  

“Low Volatility” Stocks Versus the Market (Since Low in Interest Rates)
“Low Volatility” Stocks Versus the Market (Since Low in Interest Rates)

Market Today

Over the past two months, investors have been lulled to sleep by one of the flattest two-month periods in decades.  Today, the sleeping dog awoke.  A number of comments from people like Mario Draghi and Boston Fed President, Eric Rosengren have led the market to believe that rates may have finally bottomed.  Not surprisingly, most interest-rate sensitive investments are down today.  Below are two charts that relate to the expectation of higher rates going forward.  Consumer staples stocks, which have been great winners over the past few years are very weak today and peaked (so far) at the same time interest rates bottomed; this is not a coincidence.  More on Today's Decline 

10 – Year Treasury Yield
0 – Year Treasury Yield

Consumer Staples Stocks
Consumer Staples Stocks

Occupy Wall Street

The sixth anniversary of “Occupy Wall Street”, is next week.  It turned out to be a great buy signal, as these things often do, as the market has almost doubled since then: 

S&P 500 Since “Occupy Wall Street”

Topics: Interest Rates, Consumer Staples, Market Decline, Passive Investing, Occupy Wall Street

Share this Blog


Carnegie Cropped eBook No Shadow-min

"Top 4 Questions to Ask Before Hiring a Financial Advisor"

What You'll Learn

  • The difference between fiduciary and suitability standards
  • Learn how some advisors may not be required to work in your best interest
  • Be aware of various types of hidden costs
  • The importance of third party custodians
  • The difference between fee-based and fee-only

Download Your Copy of the eBook Below

Recent Posts

Subscribe here for monthly blog updates!