Low Vol Doesn’t Mean Value

Jason Zweig writes in the WSJ on the allure of Low Vol funds:

At year end, the stocks in the iShares portfolio — among them Newmont Mining, AT&T, McDonald’s Corp. and Johnson & Johnson — traded at an average price of 22.2 times their earnings over the previous 12 months. That was almost identical to the P/E ratio of 21.8 for the U.S. stock market as a whole.

By the end of April, after all that new money had flowed in, the holdings of the iShares fund were at an average P/E of 24.3; the stock market overall was at 22.4. In four months, the fund’s portfolio shot from being only a hair more costly to nearly 10% more expensive than the market average.

It’s true that the academic research has shown that Low Vol portfolios have historically outperformed the market. But some investors have confused Low Vol with Value. There’s a lot of overlap but they’re not the same.

For example, there are many stalwart growth stocks that exhibit low daily volatility, yet their blue chip status accords them lofty valuations.

Posted by on May 9th, 2016 at 9:20 pm


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