this Monday, Sept. 26, 2016, file photo, specialist
Anthony Matesic works on the floor of the New York
Stock Exchange. Investors poured into low-volatility
funds earlier in 2016 in search of a smoother ride,
but the ride has turned out to be too interesting
YORK — Whoa, give us back our money. We wanted
what a growing number of investors are saying after
joining the wave earlier this year into so-called
"low-volatility" funds. These types of funds try
to offer nervous investors a smoother ride, by buying
stocks with a history of milder price swings than the rest
of the market. Think power utilities, phone companies and
other traditionally staid industries.
these funds did help investors sleep easier early this
year by falling less than broad-index funds when markets
were sinking, their shakier performance since the summer
has triggered the departure of billions of investors'
what's happened to two of the largest low-volatility
exchange-traded funds, the iShares Edge MSCI Min Vol USA
ETF and the PowerShares S&P 500 Low Volatility
Portfolio ETF. More than $8 billion flowed into them
during the first seven months of the year, according to
FactSet, as jittery investors searched for steadier
options. Bonds are where investors traditionally go when
they want something safe, but super-low interest rates
mean they produce less income and put them at greater risk
late June, low-volatility funds passed a huge test after
the United Kingdom unexpectedly voted to leave the
European Union. The S&P 500 sank 3.6 percent the day
after the vote, while the largest low-volatility ETFs lost
only half that.
the worries about the global economy, investors were happy
with the trade-off inherent in low-volatility funds:
milder drops when markets are down in exchange for more
modest gains when the market is hot.
investors poured into low-volatility funds as the summer
heated up, and all the demand pushed prices higher for
stocks with a history of less volatility. But the ascent
meant these stocks were also growing more expensive
relative to how much profit they produce, an important
measure of valuation.
stocks in the S&P 500 were trading at more than 21
times their earnings per share in July, for example. That
was well above their average over the last decade of 15
times and high enough that some market watchers warned
they were too expensive.
July, the tide has turned for low-volatility funds. Not
only have they had worse returns than a traditional
S&P 500 fund, they've also had sharper losses during
the worst days.
9, for example, the two largest low-volatility ETFs lost
2.9 percent and 2.7 percent, when a broad S&P 500
index fund lost 2.4 percent. The low-volatility funds have
also had more days where they've lost at least 1 percent
than S&P 500 funds. Since the start of August, the
low-volatility ETFs have lost roughly four times more than
the S&P 500's 1.2 percent loss.
valuations were only one of the reasons for the turnaround
in performance. The utility and telecom stocks that
low-volatility funds are full of are also among the types
most at risk from rising interest rates.
for example, is a top holding for both of the largest
low-volatility ETFs. It had been doing well in large part
because it pays a $1.92 annual dividend, and its 5 percent
dividend yield is much higher than the 1.73 percent
offered by a 10-year Treasury note. But, as interest rates
rise, the worry is that income investors will sell
AT&T and other high-dividend stocks when they move
back to bonds. AT&T lost 3.6 percent on Sept. 9, more
than the S&P 500, when speculation rose that the
Federal Reserve will begin raising interest rates again.
end of July, investors have pulled nearly $2.2 billion
from the two largest low-volatility ETFs.
fair, the main job for these funds is not to lose less
than the rest of the market. Instead, their objective is
to track an index of stocks that have a history of being
less volatile. And their real purpose may be something
altogether different: To help keep nervous investors
invested in the market, even when stocks are gyrating.
History has shown that investors trying to time the market
- by jumping in and out - often end up in worse position
than those who simply stayed the course.
though, investors want off the not-boring-enough ride.