A few years later index providers such as MSCI and S&P started to create low-volatility indices. Modern portfolio theory and volatility are not the only means investors use to analyze the risk caused by many different factors in the market. And things like risk tolerance and investment strategy affect how an investor views his or her exposure to risk. Derived from the price inputs of the S&P 500 Index options, it provides a measure of market risk and investors’ sentiments.
Common strategies for implementing the low-volatility factor include a minimum variance portfolio, equal weight portfolio, and risk-parity portfolio. These strategies focus on selecting stocks that minimize overall portfolio volatility or allocate capital based on risk contribution. Incorporating the low-volatility factor into a portfolio management strategy can help investors achieve several objectives, such as reducing portfolio volatility, improving risk-adjusted returns, and preserving capital.
When times are good and your wallet is fat, you’re more than happy to buy things like sneakers, a new purse and video games, and go out more often to restaurants and movie theaters. Most online brokerage firms will show the beta for a company, but you should also look for the beta for that industry. Stocks with low volatility aren’t always easy to spot, but they can be found as long as you understand what volatility is and how it can be measured. Kiplinger is part of Future plc, an international media group and leading digital publisher. Dollar General (DG, $211.52) operates a network of 16,720 neighborhood stores across 46 states that sell snack foods, cleaning supplies, houseware items and other frequently used, low-cost items to customers.
What is the low-volatility factor, and why is it important in portfolio management?
Therefore, if the S&P 500 increased by 15%, the fund would be expected to increase by 15.75%. On the other hand, a fund with a beta of 2.4 would be expected to move 2.4 times more than its corresponding index. So if the S&P 500 moved 10%, the fund would be expected to rise 24%, and if the S&P 500 declined 10%, the fund would be expected to lose 24%. A stop-loss order is another tool commonly employed to limit the maximum drawdown. In this case, the stock or other investment is automatically sold when the price falls to a preset level.
Since price is measured in dollars, a metric that uses dollars squared is not very easy to interpret. Therefore, the standard deviation is calculated by taking the square root of the variance, which brings it back to the same unit of measure as the underlying data set. And with a methodology that prioritizes low volatility over high growth potential, you can have faith that you won’t be sticking your neck out on the riskiest companies in these regions. Though foreign, these countries are quite similar to the U.S. in both their economic might and their investor protections. So if you’re looking for low-volatility ETFs that provide diversification outside of domestic stocks, EFAV is a great option. Kyle Woodley is the Editor-in-Chief of WealthUp, a site dedicated to improving the personal finances and financial literacy of people of all ages.
The company also was successful in expanding its share of the U.S. cereal market, improving the performance of its U.S. snack and yogurt business and returning its Canadian operations to growth. Hormel’s sales rose 4% in the July quarter as a result of strength in its grocery and refrigerated products categories that more than offset COVID-related declines in foodservice sales. The company’s EPS growth was flat due to incremental costs related to COVID, but free cash flow grew 72% as a result of strong inventory management. During the company’s June quarter, for instance, COVID-related shutdowns of customers’ businesses reduced trash volume and hit sales. But adjusted EPS actually rose by nearly 3% and year-to-date cash flow grew 17%. The company even rewarded investors with a 5% dividend hike – its 15th consecutive year of dividend growth.
But with roughly 350 holdings, there are plenty of smaller and relatively unknown emerging markets options out there, too. However, it’s important to know that while these funds are good can often reduce overall volatility over longer time periods, they still can suffer mightily against sudden market shocks. The simple fact that they’re meant to reduce volatility doesn’t mean they’re immune.
The company opened 500 new stores during the first half of 2020; it also remodeled 973 stores and relocated 43. Kimberly-Clark (KMB, $147.63) owns some of the world’s most trusted brands in personal care and numerous $5 billion/annually brands such as Huggies, Scott, Kleenex, Cottonelle and Kotex. Drug maker Bristol-Myers Squibb (BMY, $59.82) was transformed by the 2019 acquisition of Celgene, which added treatments for cancer and autoimmune disorders to its drug portfolio. Celgene owned cancer drugs Revlimid, Pomalyst/Imnovid, Abraxane, and Reblozyl and bone marrow disorder treatment Inrebic. BMY already held several blockbuster products in its portfolio, including Eliquis (blood coagulation) and Orencia (for moderate to severe rheumatoid arthritis).
NIFTY 100 Low Volatility 30 Index
Potential limitations and risks of low-volatility factor investing include underperformance during strong bull markets, sensitivity to interest rate changes, and sector or stock concentration risks. Investors should be aware of these limitations and carefully assess their individual risk tolerance, investment horizon, and return objectives when constructing a low-volatility portfolio. The standard deviation essentially reports a fund’s volatility, which indicates the tendency of the returns to rise or fall drastically in a short period of time. A volatile security is also considered a higher risk because its performance may change quickly in either direction at any moment. The standard deviation of a fund measures this risk by measuring the degree to which the fund fluctuates in relation to its mean return.
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They surged in popularity following the stock market meltdown triggered by the 2008 crisis, and they’ve long proven able to outperform their benchmarks over long periods. For example, between December 1990 and December 2019, the S&P 500 Low Volatility Index produced a 10.9% average annual return, versus 10.2% for the index itself. The low-vol index also had a return/risk of 0.85 versus 0.58 for the plain index. Incorporating the low-volatility factor into a portfolio management strategy can offer investors a range of benefits, including reduced portfolio volatility, improved risk-adjusted returns, and capital preservation during market downturns. Many day traders like high-volatility stocks since there are more opportunities for large swings to enter and exit over relatively short periods of time.
But when we use both these strategies with 50% weightage to the momentum index and 50% to the low volatility index, it shows that the combination would have done even better than the standalone strategies. The combination would have outperformed the NIFTY 50 in 12 out of the last 15 years. After the calculation of volatility, the top 30 stocks are selected on the basis of their inverse volatility.
Watch how volatility affects the total amount of money you’ll have at the end of each year, based on the returns above. Verizon raised its dividend by 2% in September, marking its 14th consecutive year of payout growth. This highly rated Dow stock is also among the market’s higher-yielding low-volatility stocks, at well more than 4% right 10 reasons bitcoin is a terrible investment now. Verizon Communications (VZ, $59.45) is a leader in communications technology, offering voice, data and video services to consumers and businesses on its award-winning platform.
- Merck is one of the coolest cucumbers on the market – over the past five years, it has been 65% less volatile than the S&P 500, based on beta.
- Stock market volatility is arguably one of the most misunderstood concepts in investing.
- As proof of its low-volatility credentials, this fund was relatively flat in calendar 2022, while the broader S&P 500 lost nearly 20%.
- GIS shares, which by beta are the most stable of these 12 low-volatility stocks, are valued at just 16 times earnings estimates and a 7% discount to their historical average forward P/E.
- It is one of the largest pharmaceutical players in the world, led by cancer wonder-drug Keytruda – itself a $6.3 billion business during the third quarter of 2023 alone, which, by the by, was 17% higher than in the year-ago period.
- But if you want additional peace of mind or are more concerned with capital preservation than growth, the following nine low-volatility ETFs all have something to offer.
General Mills expects at-home food demand to remain elevated in What is m&a 2021, which should help its brands gain more market share. GIS’s brands, in fact, have gained more household penetration over the past six months than its leading branded competitor in 8 of 10 food categories. Costco’s core strength is its vast membership base, which provides annuity-like revenues from annual renewal fees. The company boasts 101.8 million total card holders, 55.8 million member households and an impressive 91% annual membership renewal rate. Raymond James analyst Dane Leone reiterated his Outperform rating on BMY shares in September. He began covering the stock in July and anticipates clinical updates coming on several drug candidates in the second half of this year, such as TYK2 (psoriasis) and ozanimod (inflammatory bowel disease), will boost the 2021 outlook.
Coca-Cola (KO, $60.16) is another Dividend Aristocrat from the consumer staples sector that manages to stay chill when the market sweats. In addition to Procter & Gamble being relatively stable, with low betas indicating smoother performance compared to the market for several years, it’s well-positioned for the long haul. Enter Procter & Gamble (PG, $148.14), which is one of the world’s top consumer staples brands. It’s responsible for Always feminine hygiene products, Charmin toilet paper, Crest toothpaste, Dawn soaps and Head & Shoulders shampoos, among dozens of other ubiquitous brands. McDonald’s (MCD, $294.35) is a global burger juggernaut, boasting 40,000 locations in more than 100 countries. The company managed to keep its top and bottom lines on forex education the upswing during COVID, and it’s expected to extend streaks of revenue and income growth this year.
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Bristol-Myers’ sales rose 62% during the August quarter to $10.1 billion, mainly due to the contribution from Revlimid, which has quickly become the company’s best-selling drug. BMY incurred a net loss because of acquisition and integration-related costs, but adjusted EPS (which excludes these costs) improved 38% and the company boosted guidance for this year’s adjusted profits. Republic Services benefits from a defensive business model with roughly 80% recurring revenues, an investment-grade credit rating and robust free cash flow generation that is the result of the essential nature of its services.