by Jeff DeMaso | September 27, 2013 1:49 pm
As I’m sure you know, reducing volatility has struck a chord with investors burned by two bear markets over the past 15 years, who don’t think they can stomach another one in the future. True to form, the financial industry, Vanguard included, is responding to this demand with the promise of performance without pain—or at least without lots of pain.
When the newly-announced Vanguard’s Global Minimum Volatility Fund does come to market, despite being actively managed, it will be competing mostly with ETFs tracking low-volatility indexes. A handful of mutual funds explicitly target low volatility stocks but they haven’t caught on with investors the way ETFs have. Assets in these funds remain puny.
It’s really in the ETF space where low (or minimum) volatility has caught fire. iShares, StateStreet and PowerShares have all launched low volatility ETFs over the past two years or so. Today there are 11 ETFs in this space holding over $11 billion in assets. (See the table below.) Vanguard’s fund will compete head-to-head with iShares MSCI All Country World Minimum Volatility ETF (ACWV).
One thing to keep in mind about these low volatility funds is that they can have significantly different exposure to market sectors or even geographic regions compared to standard capitalization-weighted indexes. The table below compares sector and regional weights between the iShares MSCI ACWI ETF (ACWI) and its low volatility sibling, ACWV.
You can see that the low volatility version has more exposure to defensive sectors like healthcare and utilities, while being underweight sectors like technology and financials. I also find meaningful differences in regional exposures as the low volatility ETF has far less invested in Europe and more in Asia.
But what about the premise of these funds, that they’ll provide performance with lower risk? I don’t think investors are going to worry very much about the sector or regional differences if the performance is there.
Unfortunately, it’s really too soon to say one way or another. Since inception ACWV (the low volatility version) has lagged ACWI by over 5.5%—29.2% versus 34.8%. However, this is to be expected in a strong bull market— low volatility ETFs are meant to shine in market drawdowns, and they haven’t been battle-tested yet.
So, Vanguard’s entering a fairly new arena with its own quantitative, internally-managed, low-volatility portfolio. They’ll have a big educational job ahead of them and I expect a “white paper” to appear extolling the virtues of low-volatility investing, particularly when combined with low costs.
Still, I am a bit puzzled as to why Vanguard chose a global fund for their first foray into the low volatility space. With $3.7 billion in assets Vanguard Total World Stock (VTWSX) and $4.3 billion in the actively-managed Vanguard Global Equity (VHGEX), both are decent sized funds. But they pale next to Vanguard Total International Stock Index’s (VGTSX) $96.4 billion and Vanguard Total Stock Market’s (VTSMX) $262.7 billion in assets. To say that global funds haven’t exactly caught on at Vanguard would be an understatement.
Maybe Vanguard didn’t want to cannibalize assets from their bread and butter index funds, but it seems there would be room for separate U.S. stock and foreign stock low volatility funds to prove the point before venturing into the all-in-one space.
As of this writing, Jeffrey DeMaso did not hold a position in any of the aforementioned securities.
Senior Editor Dan Wiener and Editor/Research Director Jeffrey DeMaso publish The Independent Adviser for Vanguard Investors, a monthly newsletter that keeps abreast of recent developments at Vanguard, and the annual FFSA Independent Guide to the Vanguard Funds.
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