Investors are well aware that market ups and downs are back, as we’ve discussed at length here on The Blog. But, as Sara Shores explains, there is a strategy you can implement that can help you weather the storm.
In my post on smart beta predictions for the year, I suggested that a minimum volatility (or min vol) strategy would be top of mind for investors. It hasn’t taken long for that trend to materialize, as this segment posted strong returns and enjoyed inflows of $1.9 billion in the first month of 2015. (Source: Bloomberg; BlackRock ETP Landscape Report) In today’s market climate — where volatility has moved from historical lows to above long-term averages in just a few short months — the case for min vol is particularly timely.
Market Realist – Use minimum volatility funds to guard against volatility.
The volatility index or the VIX (VXX) (XIV) is often called a “fear gauge.” The higher the index level, the riskier investors perceive the stock markets to be. Meaning, there would be more ups and downs in the stock market (VTI).
For most of 2014, the VIX remained low, as corporate earnings remained robust. The market was bordering on complacency. However, in October, the index spiked as softening global growth (ACWI) threatened the market. This year, so far, it has been generally higher than last year, as the graph above suggests. The average level for the whole of last year was 14.2. The average for this year so far is 16.8. The long-term average of the VIX is ~20.
With volatility likely to stay high this year and beyond, investors are looking for safer investments. While defensive sectors including health care (XLV), biotech (IBB) and consumer-related sectors (XLY) (XLP) have traditionally been used to guard against volatility, there are more sophisticated vehicles in the market which protect your portfolio from excess volatility. This series will focus on one such vehicle: minimum volatility funds.