Is Low Vol Closet Value Investing?

One of the popular investing anomalies in recent years is the case of low-volatility stocks. It turns out that stocks that don’t move around a lot have actually performed better than the overall market. This runs counter to a lot of financial theory which holds that investors “pay” for better returns by taking on more risk, which means higher volatility. The theory sounds great and intuitively makes sense. The problem is that real world results haven’t been very cooperative.

I don’t deny results. The numbers for low vol are impressive. What I don’t get is how low vol is different from simple value investing. The two strategies may be plowing the same field. A value stock is likely to have a higher dividend yield, therefore it’s likely to have less volatility. Is low vol a reflection of value, or vice versa? I really don’t know.

Low vol strategies have not worked very well over the past several months. The chart below shows how similar low vol and value are.

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The blue line is the Utility Sector ETF ($XLU) divided by the S&P 500. The red/black line is a Low Vol ETF ($SPLV) divided by the S&P 500. The base of the two lines are different because the nominal prices are different, but the important point is the nooks and crannies of each line. They seem to match up very well.

Eric Falkenstein, who is the leading proponent of low vol investing, insists that it’s not the same as value. Perhaps there’s some subtle difference, but for most practical purposes, low vol and value appear to be the same.

Posted by on January 6th, 2014 at 11:57 am


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