But, there are some investors who would rather invest in smart beta funds; these funds track non-cap weighted strategies, and are a strong option for those who prefer choosing great stocks in order to beat the market. Reference 1 revisited the role of gold as a diversifier in a traditional stock-bond portfolio. It also proposed adding low-volatility stocks to the portfolio in order to reduce the risks without sacrificing the returns. This strategy tilts the asset allocation toward equities when the stock market goes up.
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- To counter this, some low-volatility funds exclude companies with the highest interest rate sensitivity and then, from the remaining available companies, select those with the lowest historical volatility.
- When searching for such securities most investors will also include the stocks Beta as a criterion in determining low volatility.
- Over shorter time periods, such as one year, Jensen’s alpha is a useful performance metric, adjusting returns for market beta risk.
- You set a stop-loss at $55.00 (7.3% loss limit) and a take-profit order at $77.70 (a 35% profit target).
When searching for such securities most investors will also include the stocks Beta as a criterion in determining low volatility. Changes in volatility affect leveraged volatility ETFs in several interconnected ways beyond simply amplifying the price. Higher volatility forces larger end-of-day rebalancing, potentially increasing transaction costs and slippage in less liquid markets. It also magnifies the mathematical “volatility drag” that erodes returns in oscillating markets through the compounding of daily returns, among other effects. Leveraged volatility ETFs are higher risk and provide different return profiles compared with traditional ETFs.
For investors who are more risk averse, buying and holding low volatility securities in their portfolios can help them mitigate the uncertainty that results when the market corrects or shifts. Instead of investing in fixed income securities that generate lower returns, investors can use low volatility securities to benefit from the potential higher returns that equities can provide. As with other leveraged ETFs, these use debt to buy additional futures, swaps, and options to achieve market exposure that surpasses their total net assets. By carefully constructing portfolios of derivatives and cash instruments, these ETFs create synthetic exposure that delivers multiplied returns. Selecting companies with robust financial health ensures portfolios are more resilient during challenging market phases. Firms with strong balance sheets, consistent earnings, and operational efficiency provide stability and long-term growth potential.
The five stocks highlighted score well across multiple models used by Validea while also exhibiting low standard deviation compared to the overall market. Investment-grade bonds are issued by corporations or governments with high credit ratings, indicating low default risk. These bonds offer fixed interest vantage fx payments and can be less susceptible to market fluctuations when compared with stocks. By investing in investment-grade bonds, investors could achieve predictable returns with lower risk, making them an integral part of a low volatility investment strategy.
Combining these approaches creates a good foundation for managing market challenges effectively. Regularly allocating a fixed amount of capital ensures steady investment regardless of market trends. This approach mitigates the impact of poorly timed decisions and helps take advantage of lower asset prices during downturns. DCA fosters a systematic way to build a diversified portfolio while reducing emotional biases. Investing in both domestic and international markets mitigates the risks of economic downturns in any single region.
In this post, I’ll explore how to enhance portfolio diversification using low-volatility stocks. Dhillon warns that low-volatility equities don’t always outperform the stock market. They tend to underperform during strong bull markets and outperform during severe bear markets.
The low volatility factor explained
- Private investments have delivered higher returns and lower volatility relative to comparable public market investments historically.
- While popular for taking advantage of volatility during market upheavals, these funds adjust their leverage daily, making them suitable for short-term trading and hedging only, not as long-term investments.
- Owners are incentivized to contribute capital and talent to ensure each deal’s success and have little incentive to exit companies during market lows.
The VIX reads cryptocurrency exchanges: guide for beginners levels of 10 to 20 during calm markets but can reach 40, 50, or beyond when markets experience stress (it reached 60 in April 2025, and the record is 87, set during the 2008 Financial Crisis). The primary objective of the NFO is to generate long-term capital growth by investing in securities forming part of the Nifty 500 Low Volatility 50 Index. The goal is to deliver returns before expenses that closely mirror the index, although the Groww Nifty 500 Low Volatility 50 ETF does not guarantee that the objective will be achieved. As we know, sentiment can swing wildly and drive short-term pricing for publicly traded assets.
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Over the long term, this can translate into better risk-adjusted returns (higher returns for the risk taken), which makes these funds attractive to risk-averse investors. During bull markets, where the market is growing, a low volatility portfolio will typically underperform compared to the general market. Additionally, many successful private investments avoid highly cyclical sectors such as travel and tourism or those dependent on resource prices, either as inputs or outputs. In fact, the sector exposure of buyout private equity, for example, is unlike the sector exposure of public market benchmarks. And concentrating investments in non-cyclical sectors naturally dampens portfolio volatility in comparison to the public indexes.
Performance
By employing financial derivatives and debt together with other methods, these products significantly increase exposure to volatility indices. A 2x leveraged volatility ETF effectively doubles the daily percentage movement of its underlying index. “These products have proven to be short-time winners in turbulent times,” tending to “move higher as long as market turmoil lingers,” an April 2025 analysis by Zack’s notes. While popular for taking advantage of volatility during market upheavals, these funds adjust their leverage daily, making them suitable for short-term trading and hedging only, not as long-term investments. Diversification not only protects against volatility but also positions portfolios to capture growth opportunities across different markets and industries.
Certain sectors, such as consumer staples, utilities, and healthcare, tend to remain resilient during turbulent periods. Investment-grade bonds and dividend-focused ETFs provide additional stability and income. Assets in these categories balance the portfolio by offering predictable performance even when broader markets decline.
Strategies against market volatility: Why diversification works best
Diversification in finance is a strategy that involves spreading investments across various assets, sectors, and geographies to reduce risk and improve stability. Instead of concentrating capital in a single area, diversification allows investors to balance potential losses in one investment with gains in another. Validea’s model based on Pim van Vliet starts with the 1000 largest stocks in the U.S. and eliminates the 500 with the highest standard deviation. The remaining stocks are then ranked based on momentum and shareholder yield (dividends + buybacks). This quantitative approach implements van Vliet’s research findings that combining low volatility with other factors that have worked well historically can lead to market-beating returns. Portfolios built with diversified assets tend to deliver steadier risk-adjusted returns over time.
Portfolios of low-volatility stocks One of the simplest techniques is to build a portfolio of stocks that typically have less-than-average volatility. ETFs, for example, simply hold the 100 stocks in the S&P 500 that had the lowest daily volatility over the past year. Some Canadian low-volatility ETFs are based on the S&P/TSX Composite Low Volatility Index, which selects the 50 least-volatile stocks from the TSX index. A toe in the water For risk-averse investors, low-volatility funds can provide a less stressful entry point to equity investing. The low volatility factor can be captured through factor-based indices, such as smart beta and risk premia strategies.
While traditional ETFs typically aim for one-to-one correspondence with their benchmarks and can be suitable for long-term investing, leveraged ETFs are designed specifically for short-term (intraday) trading. These funds don’t hold or follow a collection of shares, but instead target market volatility, which measures how large and frequent price changes occur (as opposed to the market’s direction). These products enable investors to trade market uncertainty by offering exposure to anticipated fluctuations. Market volatility is an inevitable part of investing, but its impact can be mitigated with the right strategies.
With balanced funds, an investor can use a investing vs speculation mix of stocks and bonds to earn growth and income with reduced volatility. These funds are managed to maintain a specific allocation between equities and fixed-income securities, offering diversification that can help mitigate market risks. Balanced funds are ideal for investors seeking a one-stop solution for achieving a well-rounded, low volatility portfolio. Low volatility investing is a compelling approach supported by historical data and academic research. By focusing on stocks with smaller price fluctuations and combining that with other alpha-generating factors, investors can aim to achieve superior risk-adjusted returns.