Tag Archives: volatility

Low Volatility Funds Outperform In 2016

In July and August of 2015, I wrote an expansive series of fourteen articles on the Low Volatility Anomaly, or why lower risk investments have outperformed higher risk investments over time. This Anomaly seems paradoxical; investors should be paid through higher returns for securities with a greater risk of loss. Across different markets, geographies, and time intervals, the series shows that higher beta investments have not delivered higher realized returns and offers suggestions backed by academic research to suggest why this might be the case. We are in another period where lower volatility stocks are dramatically outperforming higher beta stocks, and this article will demonstrate the relative performance of these strategies year-to-date. I will demonstrate the relative performance across capitalization sizes (large cap, mid-cap, and small cap equity) and other geographies (international developed and emerging markets). Readers may counter that, of course, lower risk stocks are outperforming in a down market, so I will show relative performance of the indices underpinning these strategies back to the March 2009 cyclical lows. If lower volatility strategies capture less upside in bull markets, then perhaps their value in corrections is overstated. Let’s look at the evidence. Year-to-Date Performance: Large-Cap Thus far in 2016, the two most popular low volatility exchange-traded funds, the iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ) and the S&P 500 Low Volatility Portfolio (NYSEARCA: SPLV ) are handily beating the S&P 500 (NYSEARCA: SPY ), the broad domestic equity market gauge. Through Friday’s close, the S&P 500 has generated a -8.46% total return while the most popular low volatility funds have lost just over three percent. Relative performance is graphed below: Click to enlarge Source: Bloomberg; Standard and Poor’s Year-to-Date Performance: Mid-Cap Mid-cap stocks have further underperformed large cap stocks thus far in 2016 with the SPDR S&P MidCap 400 ETF (NYSEARCA: MDY ) producing a -9.57% return. The low volatility subset of this index, replicated through the PowerShares S&P MidCap Low Volatility Portfolio (NYSEARCA: XMLV ) has also meaningfully outperformed in 2016, besting the mid-cap and large cap indices. For a historical examination of the risk-adjusted returns of this index, see my article on ” The Low Volatility Anomaly: Mid Caps “. Click to enlarge Source: Bloomberg; Standard and Poor’s Year-to-Date Performance: Small Cap Like both large and mid-cap stocks, the PowerShares S&P SmallCap Low Volatility Portfolio (NYSEARCA: XSLV ) has meaningfully outperformed the S&P 600 SmallCap Index ETF (NYSEARCA: IJR ). While the exchange-traded fund has a limited history (February 2013 inception date), the underlying index has data back for twenty years, demonstrating a return profile that would have bested the S&P 500 by nearly four percentage points per annum with lower variability of returns. This fund may deliver both the “size premia” and the “low volatility anomaly” in one vehicle, and has acquitted itself decently (543bp outperformance versus small caps and 307bp outperformance versus the S&P 500) in a rough market start to 2016. For a historical examination of the risk-adjusted returns of this index, see my article on ” The Low Volatility Anomaly: Small Caps “. Click to enlarge Source: Bloomberg; Standard and Poor’s Year-to-Date Performance: International Developed Negative equity market performance has obviously not been unique to the United States amidst a global sell-off. The PowerShares S&P International Developed Low Volatility Portfolio (NYSEARCA: IDLV ) has outperformed non-US developed markets, besting the Vanguard FTSE All-World ex-US ETF (NYSEARCA: VEU ) by 450bp in 2016. Click to enlarge Source: Bloomberg; Standard and Poor’s Year-to-Date Performance: Emerging Markets Pressured by the spillover from decelerating Chinese growth, commodity market sensitivity, and increased market and currency volatility, emerging markets have been a focal point for stress in 2016, but the PowerShares S&P Emerging Markets Low Volatility Portfolio (NYSEARCA: EELV ) has meaningfully outperformed the two largest emerging market exchange traded funds – the Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ) and the iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ). Click to enlarge Source: Bloomberg; Standard and Poor’s In past articles, I have often demonstrated the efficacy of Low Volatility strategies by showing the relative outperformance of the S&P 500 Low Volatility Index (NYSEARCA: SPLV ) versus the S&P 500 and S&P 500 High Beta Index (NYSEARCA: SPHB ). The Low Volatility bent produces both higher absolute returns and much higher risk-adjusted returns. Click to enlarge Readers might look at these cumulative total return graphs and believe they can time the points at which high beta stocks outperform. From the close of the week at the cyclical lows in March 2009 to Friday’s close, the Low Volatility Index has also outperformed on an absolute basis. Click to enlarge In a long bull market that saw 16%+ annualized returns, you have not conceded performance when including the recent correction. In addition to less variable returns over time, low volatility strategies also afford more downside protection – an important feature that has been valuable in early 2016. Disclaimer: My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon. Disclosure: I am/we are long SPY, SPLV, USMV, VWO, IDLV, XSLV, IJR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

3 Top-Ranked Real Estate Mutual Funds To Invest In

For investors looking to park their funds in the real estate sector, mutual funds are the cheapest and most convenient method. This category of funds also offers superior protection against inflation. The real estate sector has seen tough times recently, but the presence of these investments generally adds stability to a portfolio. This is because the volatility in property prices is far less compared to the kind experienced by stocks. Adding such funds to a widely diversified portfolio would increase returns while reducing the associated risk significantly. Below we will share with you 3 best rated real estate mutual funds . Each has earned a Zacks Mutual Fund Rank #1 (Strong Buy) as we expect these mutual funds to outperform their peers in the future. Alpine Realty Income & Growth Fund A (MUTF: AIAGX ) seeks current income. AIAGX invests the majority of its assets in securities of issuers involved in the real estate industry, real estate financing or controlling real estate assets not less than half of such issuer’s assets. AIAGX may invest a maximum 35% of its assets in securities of foreign issuers. The Alpine Realty Income & Growth Fund A is a non-diversified fund with a three-year annualized return of 7.5%. Robert W. Gadsden is the portfolio manager and he has been managing AIAGX since 1999. Cohen & Steers Real Estate Securities Fund Inc. C (MUTF: CSCIX ) invests a large chunk of its assets in common stocks of companies whose operations are related to the real estate domain and REITs. CSCIX is expected to invest not more than 20% of its assets in non-U.S. companies, including those from the emerging economies. CSCIX may also invest in Depositary Receipts of different countries. The Cohen & Steers Real Estate Securities Fund Inc. C is a non-diversified fund with a three-year annualized return of 10.1%. As of December 2015, CSCIX held 41 issues, with 10.28% of its total assets invested in Simon Property Group Inc. (NYSE: SPG ) T. Rowe Price Real Estate Fund (MUTF: TRREX ) seeks growth over the long term. TRREX invests a major portion of its assets in equity securities of real estate companies. TRREX invests mostly in equity real estate investment trusts. TRREX may invest a maximum 25% of its assets in foreign securities. TRREX offers dividends quarterly in March, June, September and December. Capital gains are offered in December. The T. Rowe Price Real Estate Fund has a three-year annualized return of 9.1%. TRREX has an expense ratio of 0.76% as compared to the category average of 1.29%. Original Post

Neuroeconomics And Volatility

Summary Discussion on the summer spike in volatility in relation to the three areas of neuroeconomics. How your brain and emotions affect volatility decision making. I have preached patience and the science agrees. First, thank you for reading my articles. I have great readers, as shown by the comment sections of each article and I really appreciate all of you. If you enjoy my work, please follow me on Seeking Alpha and feel free to link to or share this article. In this piece, we will look into some very interesting research in economics and how that relates to volatility. Long-Term Volatility Trends I have always asserted that the VIX is driven long term by actual and predicted economic growth and short term by a variety of factors. If you look at the long-term chart below showing the VIX Index, you will see a slight correlation to the level of volatility and the performance of the general economy that generally agrees with this theory with a couple of exceptions. (click to enlarge) (click to enlarge) Let’s state the obvious here: if the economy is doing well or expected to be doing well, then volatility will tend to be lower and vice versa. This is a longer-term view of overall volatility. However, many other short-term events will produce better opportunities to profit from spikes in volatility when using VIX futures ETFs. Neuroeconomics This is something we haven’t discussed before in regards to volatility. This field of study seeks to explain human decision making, the ability to process multiple alternatives, and to follow a course of action. Neuroeconomics textbook definition fits very well into volatility trading. To compare volatility trading to neuroeconomics, we will use Jason Zweig’s book Your Money & Your Brain as a resource. Our First Lesson Monetary losses and gains are not just pure financial and psychological outcomes. These gains and losses create a biological change which has substantial effects on the brain and body. When trading volatility, it is important to understand and plan for the potential gains and losses of a given scenario. I am sure many people reading this article had been in a trade before and wondered things such as: how the heck can this be, this is out of control, the market is dumb, people are idiots, and then why did I even make that decision. On a daily basis, I see comments on social media that lend more to the premise of impulsive gambling rather than strategic investments in volatility. Areas of the brain linked to excitement and anxiety influence our financial decision making. Those decisions can be rational or irrational in nature. The nucleus accumbens is an area of the brain that activates when we expect a reward, such as a profitable volatility trade. Financial reward will most often cause traders to make decisions based on emotions and potential outcomes rather than the evidence at hand. According to Stanford University , the nucleus accumbens is located in an area of the brain rich in dopamine which has been linked to addiction. If you are only focusing on the reward of your volatility trade, you are leaving out 75% of the equation. How can you make a successful financial decision while encouraging your brain to release dopamine? Loss Aversion Loss aversion is the theory that individuals will exhibit greater sensitivity to losses than to an equivalent gain. I recommend reading The Neural Basis of Loss Aversion in Decision-Making Under Risk. In the past several years, investors have enjoyed above-average gains for an extended period of time. This pushed inverse volatility products such as the VelocityShares Daily Inverse VIX ST ETN (NASDAQ: XIV ) to new highs and leveraged long volatility products such as the ProShares Ultra VIX Short-Term Futures (NYSEARCA: UVXY ) to new lows. It also created pockets of writers who openly touted inverse volatility products as the best trading vehicles ever (more on those results later). Let’s view a market chart and the performance of XIV from 2011 to mid-2014. It is important to note the Y axis in this chart and that the gains in XIV would have been 10x the amount of the S&P over this period of time. Graph mainly for illustration purposes of increasing gains. You can see that a clear upward trend was in place until July of 2014. Beyond that point, the market, although making new highs, began to get choppy and growth fears began to emerge exponentially in the media. See below for July 2014 to present including the VIX Index. This chart shows the percentage of change and is separated by equity to give you a clearer picture of each instrument. VIX Spike Why would the VIX Index, and subsequently the VIX futures which affect volatility ETFs, spike to a level not seen since 2008 despite the lack of an actual recession? The answer is loss aversion. Investors were less willing to lose $5 than they were to potentially gain $5 after so many years of steady gains. Hitting the sell button is easy when you are up substantially on your original position or you fall into a growing category of investors that have never experienced a market correction. There was also no shortage of dire news stories about the economy and slow global growth, further supporting the neurological decision to avoid risk. We have previously discussed how UVXY operates and its tracking of the VIX futures. You can read more about UVXY and other volatility products in the ETF Guide . When the VIX futures were spiking this past summer, UVXY went on a tear and produced incredible gains in a short period of time. See below: (click to enlarge) During this time period, you had incredible interest in UVXY mainly coming from news features and a huge spike in social media volume. Bandwagoners looking to make a quick buck were sucked in. Some got out ahead, and others didn’t. By the time some traders realized they had made a mistake, the natural dopamine had long worn off and reality started to set in. Although unfortunate for them, these traders are an essential part of the volatility food chain in which the patient and well positioned survive. Conclusion I hope you have enjoyed this first lesson on volatility trading in relation to neuroeconomics. I look forward to bringing you more lessons as my schedule permits. To recap, we discussed how chemical and physical changes in the brain due to gains and losses on your investments influence the decision-making process. As volatility traders, we can take advantage of this information by clearly seeing through the market turmoil and making decisions based on evidence (past and present) rather than emotion. By understanding the parameters that volatility futures will trade in, the usual highs and usual lows based on the current scenario and historical figures, you can plan out your trade to encompass the three areas of neuroeconomics. By weighing all possible scenarios, you can be better prepared to follow through with your trade and increase the chances of profitability. As we have discussed, our natural instinct is to sell and save rather than to wait and gain. If I could pick the most common word out of my volatility articles here on Seeking Alpha, it would be patience and the science behind your decision making agrees. For more information on volatility trading and its related ETFs along with strategies and educational series, please check out my library here on Seeking Alpha. As always, thank you for reading!