So if a min vol strategy tends to outperform the broader equity markets when volatility is on the rise, yet underperform when volatility abates, wouldn’t it just be a wash? Not so fast. The chart below shows the performance of the same two indexes over the same time period with both set to a base value of 100 points. Here you can see that by limiting the downside during some of the deepest troughs of a volatile market, the min vol index was better able to capitalize on a rebound.
Market Realist – The graph above shows the performances of the S&P 500 (SPY)(IVV) and the iShares MSCI Minimum volatility ETF (USMV) from June 2008 to May 2012. In that period, the former gave returns of a meager 2.3% compared to the 22.9% of the latter. This translates to 0.7% and 5.3%, compounded annually over those four years.
Although the minimum volatility fund underperforms when the VIX index (VXX)(XIV) is low, it has provided not only better risk-adjusted returns but also better returns from June 2008 to May 2012. The next part of this series more light on this trend.