The recent plunge in the Turkish lira has only added to investors’ jitters. As EM stocks fall, many investors may be looking to US stocks as a hedge against risk. Based on past periods of EM turbulence, I believe US low volatility stocks in particular warrant a closer look.
Low volatility stocks have typically outperformed in times of EM stress
The table below highlights material sell-offs (greater than a 15% loss from peak to trough) in the MSCI Emerging Markets Index dating back to 2011. In each case, the S&P 500 Index outperformed the EM index, but still generated negative returns in four of the five periods. In contrast, the S&P 500 Low Volatility Index generated positive returns in four of the five periods.
*Represents most recent data
Source: Bloomberg, L.P., as of Aug. 15, 2018. Based on weekly closes. Past performance is not indicative of future results. An investment cannot be made directly in an index.
A factor is a quantifiable characteristic of a security that to a large extent explains its risk-return profile. Targeting these underlying drivers of return may provide a more finely tuned, systematic approach to portfolio construction. The low volatility factor measures the magnitude of up and down swings in a stock’s trailing 12-month price returns, and these strategies seek to invest in stocks with a history of providing a smoother ride.
During times when emerging market stocks have declined at least 15%, US low volatility stocks have generally outperformed the broader US market (as defined by the S&P 500 Index). The potential for US low volatility stocks to help reduce downside risk may be attractive in an environment filled with EM risk, especially given a robust US economy that is benefiting from deregulation and tax cuts.
The MSCI Emerging Markets Index is an unmanaged index considered representative of stocks of developing countries.
The S&P 500® Index is an unmanaged index considered representative of the US stock market.
The S&P 500® Low Volatility Index consists of the 100 stocks from the S&P 500® Index with the lowest realized volatility over the past 12 months.
Factor investing is an investment strategy in which securities are chosen based on certain characteristics and attributes. Factor-based strategies make use of rewarded risk factors in an attempt to outperform market-cap-weighted indexes, reduce portfolio risk, or both.
Low volatility cannot be guaranteed.
The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
The Invesco S&P 500 Low Volatility ETF (SPLV) was unchanged in premarket trading Wednesday. Year-to-date, SPLV has gained 4.96%, versus a 9.08% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of Invesco.