The Investor’s Guide to the Low Volatility Anomaly

Kudos to Tadas (like how that sounds) at Abnormal Returns for his recent blogging and book about what’s know as the low volatility anomaly.

Simply, accepted theory is that higher volatility stocks (ie riskier) should perform better than lower volatility ones over time. You know, the old risk-return tradeoff.

The thing is that in practice, they don’t.

There’s been a growing body of research and interest into this phenomenon and I thought it would be worthwhile to make some order out of this.

The investor’s guide to the low volatility anomaly

Much of the interest into this curious fact has stemmed from academic research.

Academic Research on the low volatility anomaly

• Benchmarks as Limits to Arbitrage: Understand the Low Volatility Anomaly (Baker, et al)
• Low Risk Stocks Outperform Within All Observable Markets of the World (Baker, Haugen)
• Interview: Nardin Baker on the low volatility anomaly, Part II (Abnormal Returns)
• How to improve the potential of less volatile stocks (Institutional Investor)
• When Quality Pays: A Fundamental Approach to Pursuing Lower Risk and Higher Returns (PIMCO)
• The Greatest Anomaly in Finance: Understanding and Exploiting the Outperformance of Low-Beta Stocks (Advisor Perspectives)
• Minimum variance portfolios in the US equity market (Clarke, de Silva, Thorley)

Reporting on the low risk volatility anomaly

• Fund file: Risk does not pay (FT)
• Interest is high in low volatility ETFs (Barron’s)

Illustrations

Discussion

• Less risk equals more reward? (Bogleheads)
• Guggenheim’s Nardn Baker explains why the low volatility anomaly exists (Pensions and Investments)
• Earliest low volatility article (Falkenblog)

Video

Morningstar: When less risk equals more reward

Tools

• Lowvolatilitystocks.com

Low volatility investment products

• Russell Developed ex US Low Volatility ETF ($XLVO)
• iShares MSCI USA Minimum Volatility ETF ($USMV)
• PowerShares S&P Low Volatility Portfolio ($SPLV)
• Russell 1000 Low Volatility ($LVOL)
• Russell 2000 Low Volatility ($SLVY)
• iShares MSCI All Country World Minimum Volatility Index ($ACWV)
• Summit Global Investments Low Volatility Equity Fund ($SILVX)

What did I miss?