Are Minimum Volatility Funds Living Up To Their Name?

Almost 8 months ago we featured minimum volatility ETFs in a Fund Spotlight Series article. Since then, these funds have had their first “test”, how have they performed?

At the time, I wrote about minimum volatility ETFs:


  • Little history of how these will perform in bear markets.

  • Outperforming the markets? Or just Wall Street’s favorite investment idea for the day?”


Since then, we have seen a short correction in the U.S. stock market and emerging markets nearing bear market territory. Did the outperformance continue? Or have minimum volatility funds fallen off like the majority of Wall Street fads?


In the fund spotlight article we considered 4 minimum volatility funds. An S&P 500 minimum volatility fund, a U.S equity minimum volatility fund, an emerging market minimum volatility fund and a total world stock market minimum volatility fund.


How have these minimum volatility funds performed? Here is an initial look:


In all the images below, the blue line is the minimum volatility fund and the red line is its “regular” (non-minimum volatility?) counterpart.


This January was the worst start to the year the stock market has had since markets were in freefall in 2009. The U.S. markets experienced ~5% correction, how did the minimum volatility funds fare?



SPLV: S&P 500 Minimum Volatility Fund

12/30/13 – 2/5/14:



3 month chart:



USMV – MSCI USA Minimum Volatility Fund:



3 month chart:



Emerging Markets have had a rough year, collectively underperforming the U.S. market by 35%. Would investing in a minimum volatility fund have helped?



6 month chart:



9 month chart:




And lastly, the world markets as a whole.


6 month chart:



9 month chart:




Nearly all minimum volatility funds have underperformed their regular volatility counterparts, with the exception of SPLV saving investors about 0.5% in January compared to the S&P 500. The performance of the emerging market minimum volatility fund is especially concerning to me, as emerging markets are close to entering a true bear market, and the minimum volatility fund is underperforming significantly.


Granted, I selected a short time frame, so we are looking at a pretty limited amount of data. But these funds were designed to help investors better weather storms, and the last few month is about the best case study we have on how these types of funds perform as they were all created post 2009.


And it seems they are failing on the performance front.


Minimum Volatility – More Than Just Performance



But of course, performance alone shouldn’t be the deciding factor of these funds. They were created not to outperform, but be more stable in price (less volatile) than their regular index.


We can calculate each fund’s volatility using the following equation:


Volatility equation



Using that equation, we find the following volatilities:

(note, the volatility below is based on the percent change of the funds each day in order to level the playing field, since their share prices are so different)

January                 3 Months                6 Months             9 Months

SPLV      0.001447434       0.001094307       0.000656931       0.000523375

SPY         0.001639082       0.001143135       0.000671477       0.000526426

USMV   0.001379671       0.000999508       0.000602366       0.000481884

EUSA     0.001601094       0.001093899       0.000614523       0.000501763

EEMV    0.002098394       0.001463514       0.000937008       0.000771653

EEM       0.002744664       0.00197838          0.001215847       0.000967796

ACWV   0.001297098       0.000939088       0.000560918       0.000482278

VT           0.001759673       0.001208582       0.000715259       0.000580911


It appears the funds are doing their job. All minimum volatility funds have had reduced volatility compared to their regular volatility counterparts.




In the first spotlight of the minimum volatility ETFs I said:


“Do stocks lose their “low volatility qualities” when they become the hot new idea on Wall Street? When everybody owns Johnson and Johnson stock, I fear that it may sell off just as strong as the general market during the next downturn.

Although this is only speculation, I don’t have a clue. Just something I am concerned about.”


And to me, that concern remains valid. The performance of the emerging market fund in particular highlights the fragile nature of these minimum volatility funds. They are all constructed based on past performance. Typically, stocks are added to the minimum volatility fund’s holdings if they have had low volatility in the past 12 months. So, these funds are made up of stocks which have not experienced volatility recently. Anyone can see that that is anything but a guarantee that they will not experience volatility in the future.

For investors worried about volatility, the answer seems to remain the same as it has always been. Adjust your Asset Allocation accordingly, don’t just jump to some new Wall Street product.

If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.”
— John Bogle

Even with today’s newest “minimum volatility” products from Wall Street, the answer does not change. If volatility of the stock market concerns you, don’t invest in stocks. Minimum volatility funds are not a substitute for stocks. And once again, a simple passive index fund seems to be beating Wall Street’s “ingenuity”.

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