Investors are leaving ‘low-volatility’ funds
— Whoa, give us back our money. We wanted something boring.
That’s what a growing number of investors are saying after joining the wave earlier this year into so-called “low-volatility” funds. These types of funds try to offer nervous investors a smoother ride, by buying stocks with a history of milder price swings than the rest of the market. Think power utilities, phone companies and other traditionally staid industries.
While these funds did help investors sleep easier early this year by falling less than broad-index funds when markets were sinking, their shakier performance since the summer has triggered the departure of billions of investors’ dollars.
Consider what’s happened to two of the largest low-volatility exchange-traded funds, the iShares Edge MSCI Min Vol USA ETF and the PowerShares S&P 500 Low Volatility Portfolio ETF. More than $8 billion flowed into them during the first seven months of the year, according to FactSet, as jittery investors searched for steadier options. Bonds are where investors traditionally go when they want something safe, but super-low interest rates mean they produce less income and put them at greater risk for losses.
Then, in late June, low-volatility funds passed a huge test after the United Kingdom unexpectedly voted to leave the European Union. The S&P 500 sank 3.6 percent the day after the vote, while the largest low-volatility ETFs lost only half that.
Given all the worries about the global economy, investors were happy with the trade-off inherent in low-volatility funds: milder drops when markets are down in exchange for more modest gains when the market is hot.
Even more investors poured into low-volatility funds as the summer heated up, and all the demand pushed prices higher for stocks with a history of less volatility. But the ascent meant these stocks were also growing more expensive relative to how much profit they produce, an important measure of valuation.