After experiencing uncharacteristically low volatility in equity markets for a number of years, investors have felt the uptick in volatility more recently. The CBOE Volatility Index (VIX) is an indicator of the market’s expectation of the S&P 500’s near-term volatility. Typically, higher values are associated with increased levels of market volatility. Since 2012, the closing daily values of VIX have ranged from 9 to 40. In fact, the VIX has closed at a value of 35 or higher twice since 2018. That’s the same amount of times it broke 35 during the six years spanning 2012 to 2017.1 Volatility can act as a drag on performance, but selling stocks to hide from volatility can lock in losses and remove growth potential from an investor’s portfolio. So what’s an equity investor to do?
At Invesco, we believe low volatility stock strategies can help.
What’s a low volatility strategy?
As the name implies, low volatility strategies focus on stocks with a history of lower volatility than their peers. For example, the S&P 500 Low Volatility Index invests in the 100 stocks out of the S&P 500 Index that had the lowest realized volatility over the past 12 months.
We see two main benefits to this approach:
• Upside participation. Because they invest in stocks, low volatility strategies have the potential to rise along with the equity markets (though they tend not to gain as much as higher volatility stocks). For example, between April 30, 2011, and Aug. 31, 2019, the S&P 500 Low Volatility Index captured 76% of the upside of the S&P 500 Index.2
• Downside risk mitigation. At the same time, low volatility strategies have tended to lose less when equity markets fall. From April 30, 2011, to Aug. 31, 2019, the S&P 500 Low Volatility Index captured just 42% of the downside of the S&P 500 Index.2