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.