Low-volatility stocks are winning as the market swings. Thank falling interest rates.

  • By Evie Liu,
  • Barron's
  • Facebook.
  • Twitter.
  • LinkedIn.
  • Print

As U.S. stocks have swung in recent days, one group of stocks that offers relative stability has outperformed.

The Invesco S&P 500 Low Volatility ETF (SPLV)—holding 100 stocks in the S&P 500 (.SPX) that have shown the least price volatility over the past 12 months—beat the broader market by 2 percentage points on Monday. The S&P 500 fell nearly 8% to start the week, posting its worst one-day percentage drop since the 2008 financial crisis.

The outperformance of low-volatility stocks goes further back as well. The group has been holding up relatively well since the stock market stumbled into its current highly volatile phase two weeks ago. As of Tuesday, the S&P 500 had gained or lost at least 3% over nine of the past 12 trading days and declined 13.6% through the entire period. During the same period, the Invesco Low Volatility ETF has lost only 10.7%.

That’s not surprising. Low-volatility is historically a risk-off strategy, with large exposure to defensive sectors such as utilities and real estate. Nine out of the top 10 holdings in the Invesco fund are utility stocks, including Eversource Energy (ES), Duke Energy Corp. (DUK), and Consolidated Edison (ED). The group is therefore less affected by the ups and downs of the business cycle, and tends to beat the market during downturns, while underperforming during rallies.

A sharp decline in interest rates has boosted the low-volatility group even further, noted Nomura Instinet strategist Joseph Mezrich.

Historically, low-volatility stocks have tended to offer higher dividend yields than the broader market, but lower than the 10-year Treasury yield, wrote Mezrich in a Tuesday note. Since 2010, however, as Treasury yields keep sliding, low-volatility stocks have often generated dividend yields higher than the 10-year Treasury. Income-seeking investors see them as an alternative to bonds, especially as bond yields keep falling.

That means the group tends to benefit more than the broader market when rates fall, while it suffers when rates rise. According to Mezrich, since 2010, during the months when 10-year Treasury yields fell by more than eight basis points (hundredths of a percentage point), the MSCI USA Minimum Volatility index outperformed the MSCI USA index by an annualized rate of 18.2 percentage points. During months when yields rose by that much, the MSCI USA Minimum Volatility index underperformed by 13.4 percentage points.

Right now, yields are near record lows as investors continue to buy Treasury debt, pushing up prices of the securities. “The low-volatility success continues to be driven by the collapse in rates and its long-existing connection to bond yields,” wrote Mezrich.

Since Feb. 24, the 10-year Treasury yield has slid by more than 0.8 percentage point from 1.374% to a record-low closing level of 0.569% on Monday. The Invesco Low Volatility ETF, at the same time, still offers a 12-month distribution rate of 2.36%

That makes it a potentially appealing choice for income-seeking investors who can weather some price gyrations in the market.

  • Facebook.
  • Twitter.
  • LinkedIn.
  • Print

For more news you can use to help guide your financial life, visit our Insights page.


Copyright © 2020 Dow Jones & Company, Inc. All Rights Reserved.
Votes are submitted voluntarily by individuals and reflect their own opinion of the article's helpfulness. A percentage value for helpfulness will display once a sufficient number of votes have been submitted.
close
Please enter a valid e-mail address
Please enter a valid e-mail address
Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

Your e-mail has been sent.
close

Your e-mail has been sent.

You May Also Like...

Precious metals: A haven in turbulent times

Some investors turn to precious metals to anchor their portfolios in a volatile market. Given Wall Street’s recent swings, it might be time to learn more about this alternative asset class.

Investors find bargains in consumer stocks

As a $2 trillion relief package makes its way through the U.S. Congress, some investors are finding bargains in consumer discretionary stocks that have been battered in the wake of the coronavirus pandemic.

What to do if you can't pay your loans

If you can't pay your loans or you soon won't be able to, you do have some options. We've included updated information on all the loan programs that may be available to you.