The proliferation in the number and breadth of ETFs offered today is nothing less than breathtaking. It’s almost as if “if you can think of an investment theme there is an ETF that covers it.” I keep thinking that we’ll know the boom has run its course when some erstwhile ETF vendor launches a new series of ETFs starting with the “A” Fund. The “A” Fund will only hold stocks whose ticker symbol starts with the letter “A”. Once assets start to swell then the “B”,”C” and so on funds will be rolled out.
You think I’m kidding.
Anyway, one interesting area that has gotten a lot of attention is the “Low Volatility” arena. For example, ticker SPLV tracks the S&P 500 Low Volatility Index, which holds the 100 stocks from the S&P 500 Index with the lowest realized volatility over the past 12 months.
Is there any merit to investing in this index, particularly in comparison to the widely followed S&P 500 Index? Rather than offering “opinion” how about we just look at the numbers.
The Test
For test purposes I am using the actual index monthly total return data for both the S&P 500 Index (SPX) and the S&P 500 Low Volatility Index (SPXLV) starting in January 1991 when the Low Volatility Index was first calculated.
Figure 1 displays the growth of $1,000 invested in both indexes on a buy-and-hold basis since 1991.
Figure 1 – Growth of $1,000 invested in S&P 500 Low Volatility Index (blue) versus S&P 500 Index (red)
Some observations, from 12/31/1990 through 8/31/2017;
*$1,000 invested in the SPXLV grew +1,576% to $16,757.
*$1,000 invested in SPX grew +1,239% to $13,390.
*1,576%versus $1,239 represents 27% more return for SPXLV.
So does this mean than SPXLV is a better investment? Not necessarily. Note that from 12/31/1990 through 3/31/2000 SPX grew +478% versus only +194% for SPXLV (since then SPXLV has outperformed +471% versus +132%).
So it is quite possible that there will be another performance swing in the future which will propel SPX back into the lead.
Still, there are a few interesting potential benefits to considering the Low Volatility Index
The Tortoise versus the Hare
Figure 2 displays some performance numbers based on all 12-month returns
| Measure | SPX | SPXLV |
| Average 12mo% | 11.0% | 11.5% |
| Median 12mo% | 13.0% | 13.4% |
| Standard Deviation | 16.7% | 12.2% |
| Ave/Std Dev | 0.66 | 0.94 |
| Worst 12 mo % | (-43.3%) | (-26.1%) |
| Maximum Drawdown% | (-50.8%) | (-35.4%) |
Figure 2 – SPX vs. SPXLV (12-month returns); 1990-2017
The key thing to note is that over the 27 test period SPXLV has outperformed SPX in each of the categories listed – i.e., higher returns, lower volatility and lower drawdowns.
To further illustrate the potential advantage to SPXLV let’s now look at rolling 5-year returns (i.e., at the end of each month we look back over the previous 5 years and compare results).
| Measure | SPX | SPXLV |
| Average 5-year% | +68.9% | +70.2% |
| Median 5-year% | +61.8% | +72.2% |
| Standard Deviation | 69.8% | 36.4% |
| Ave/Std Dev | 0.99 | 1.93 |
| Worst 60 months % | (-29.1%) | (-5.1%) |
| # times UP | 213 (81%) | 260 (99%) |
| # times DOWN | 49 (19%) | 2 (1%) |
Figure 3 – SPX vs. SPXLV (5-year rolling returns); 1990-2017
Key things to note:
*SPXLV shows a higher 5-year average % return and median % return than SPX
*The average 5-year standard deviation (a measure of volatility of returns and therefore risk) for SPXLV is only about 52% of that for SPX
*The worst 60-month performance for SPXLV was just -5.1% (versus -20.1% for SPX)
*SPX showed a 5-year gain 99% of the time versus only 81% of the time for SPX
Summary
Does any of the above mean that the S&P 500 Low Volatility Index is a better investment than the S&P 500 Index itself? That’s for each reader to decide for themselves. As we saw during the 1990’s SPX has the potential to vastly outperform its low volatility brethren. Still, if one is looking to buy and hold an index fund for the long term, the Low Volatility has to date produced higher returns, notably lower risk and a much greater consistency of returns.
Jay Kaeppel
Disclaimer: The data presented herein were obtained from various third-party sources. While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.
