Tuesday, October 04, 2011


There are two low vol ETFs out there, and there's one main difference. LVOL is Russell-Axioma US Large Cap Low Volatility Index, and is drawn from the Russell 1000. SPLV is the PowerShares S&P500 Low Volatility Fund, and is drawn from the S&P. Thus, SPLV is more large cap, LVOL more small cap.

If we look at the time series since they both have been available (7/1/11), we see the SPLV has done much better than the LVOL, just as the S&P500 did better than the Russell 1000 over this period.

Looking at my own indices, I too see that my US Minimum Variance Portfolio drawn from the S&P500 has outperformed my Beta 0.5 portfolio that is drawn from the Russell 1000, again primarily reflecting the higher cap bias on the MVP portfolio.

This highlights that there are many factors and these often explain short-term performance independent of any alpha. I think size is something to account for, so it's very important to know your benchmark, whether it is large cap or small cap, when implementing a low volatility strategy.


Anonymous said...

I have conflicting opinions on whether to overweight in small or large cap.

since Large derives more revenue from Europe and emerging markets,it's riskier in times of macro uncertainty, but large has the higher quality businesses.

Which do you think will have lower vol. going forward?

Anonymous said...

I love Eric's posts in general, but this one seems very weak. Yes, when large beats small, large lov vol all else equal will beat small low vol. No story here. And making that point over < 3 months is even weaker.

Not much here, move on to the normal high level of insight.

Eric Falkenstein said...

Methinks thou dost protest too much...that was my point...

John Hall said...

Don't worry Eric, I thought it was good. I think its very important to highlight what bets, whether in the form of factor or industry bets, any strategy is effectively taking.

Could have also added a chart showing the Fama-French alpha of all 6 series that you focus on over this period, but I don't think the daily factor data is available yet.