There have been several reasons for volatility’s return, most notably
geo-political instability, trade wars, a presidential Twitter account,
plummeting oil prices, and the fact that the bull market was already
starting to feel longer than usual.
Looking ahead through 2019, I believe equity volatility will remain
elevated due to the lagging impact of monetary tightening and the
concomitant flatter yield curve, coupled with the potential for slower
corporate profit growth.
Business as usual
What investors should try to remember, however, is that volatility is the
normal state of affairs for equities. On average, the U.S. equity market
would see declines of 5% or more about three times a year.
In this context, 2017 was the clear outlier, with not a single decline of
5% or more – in fact there were only four days when the market dropped more
than 1%. In 2018, there were five periods when the S&P 500 declined 5%
or more, and 32 days when the index’s returns were worse than -1%.
Over time, market returns tend to offer calm, smooth gains in some periods,
and more challenging, volatile returns in others. These volatile periods
can have a substantial impact on the long-term performance of equity
portfolios because there are typically greater differences between the
relative winners and losers during these periods.
Passive investors who choose the S&P 500 as their benchmark for U.S.
equities will experience the downs as well as the ups offered by this
strategy. Fortunately, though, there are alternatives for investors who
would rather limit their exposure to such instability.
The low-volatility factor
Low volatility ranks among the academically established investment factors
that drive portfolio performance. The S&P 500 Low Volatility Index
consists of the least volatile quintile of the standard S&P 500 Index,
rebalancing on a quarterly basis. Historically, this approach has helped to
limit declines during periods of heightened volatility, while maintaining
exposure to the equity market.
The fourth quarter of 2018 serves as an example. During this period, the
return on the S&P 500 was -13.8%, while the S&P 500 Low Volatility
Index returned -5.1%. Over the course of the full year, the S&P 500
returned -4.4%, while the S&P 500 Low Volatility Index finished with a
positive return of 0.3%.
It is, of course, virtually impossible to predict a resurgence of
volatility, so it may be prudent to consider a low-volatility strategy as a
core strategic holding.
is Vice President, ETF Strategist at Invesco Canada. This article first
appeared in the Invesco blog.
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All data is from Bloomberg L.P. as at December 31, 2018, unless stated
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
Low volatility cannot be guaranteed.
This does not constitute a recommendation of any investment strategy or
product for a particular investor.
Investors should consult a financial advisor/financial consultant before
making any investment decisions.
The opinions expressed are those of the author, are based on current market
conditions and are subject to change without notice. These opinions may
differ from those of other Invesco investment professionals.
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have been licensed for use by S&P Dow Jones Indices LLC and sublicensed
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The opinions referenced above are those of Hussein Rashid. These comments
should not be construed as recommendations, but as an illustration of
broader themes. Forward-looking statements are not guarantees of future
results. They involve risks, uncertainties and assumptions; there can be no
assurance that actual results will not differ materially from expectations.
© 2019 by Invesco Canada Ltd. Reprinted with permission.