Low Volatility Strategies: Winning by Not Losing
Aug. 13, 2024
Mounting concerns of a U.S. recession given weakening economic indicators — labour in particular — combined with the sudden unwinding of the Japan carry trade have shaken the market and led to overall de-risking. Against a backdrop of higher equity levels and market concentration, particularly in the U.S., the result has been a more volatile and fragile market compared to what investors have seen in some time. Many are now rotating from higher risk growth sectors to less volatile ones through exposures such as “low vol” ETFs, which are also benefitting from falling interest rates.
ETFs in Focus
The BMO ETF Low Volatility Strategy allows investors to target a specific risk tolerance to help mitigate market uncertainties. These ETFs can be used as a core portfolio position, or to complement existing broad market portfolios. Furthermore, BMO Low Volatility ETFs can be used as a tactical trading vehicle in periods of greater market uncertainty, where a more defensive portfolio may be appropriate.
As illustrated below, since the market top of July 16, ZLB has returned -1.1% vs the TSX at -4.7% (+3.6% relative return) and ZLU has returned 2.9% vs -8.0% (+10.9% relative return).1
Benefits
- Low beta investments are less volatile than the broad market
- Invests in defensive sectors to protect your portfolio during downturns
- Well diversified solutions that are much different than the broad market
- Provides downside protection with upside participation
- Lower cost than the average equity fund2
Diversified Sector Exposure
BMO’s Canadian Low Volatility ETF (ZLB) can act as a great core solution as well as a complement to the broader S&P TSX Capped Composite as it has more exposure to defensive sectors such as Consumer Staples and Utilities and is underweight Energy and Financials.
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Sectors Source: Bloomberg, as of June 30, 2024. Subject to change at any time without notice.
BMO’s U.S. Low Volatility ETF (ZLU), complements the broader S&P 500 Index as it has much less exposure to sectors such as Information Technology and Consumer Discretionary, and is overweight in defensive sectors such as Consumer Staples, Health Care and Utilities.
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Sectors Source: Bloomberg, as of June 30, 2024. Subject to change at any time without notice.
Winning By Not Losing
Overall, with the recent market volatility investors are demanding solutions that can navigate the ups and downs. BMO’s low volatility ETFs are designed to provide lower risk than the broad market while still providing growth opportunities, giving investors confidence to stay the course over the long-term. The BMO ETF Low Volatility Strategy uses beta3 as the primary investment selection and weighting criteria. By constructing ETFs with lower beta securities, the BMO ETF Low Volatility Strategy gives investors access to portfolios that are designed to provide growth while reducing exposure to market risk.
Low beta investments are less volatile than the broad market and can be considered defensive investments. Over the long-term, low beta stocks may benefit from smaller declines during corrections and still increase during advancing markets. Additionally, low beta stocks tend to be more mature and provide higher dividend yield than the broad market.
As illustrated below, BMO Low Volatility ETFs have captured the majority of market ups and effectively limited the downs relative to the broad market.4
Name |
Ticker |
Upside Capture Ratio: 3-Year |
Downside Capture Ratio: 3-Year |
72.04 |
- 60.03 |
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53.32 |
- 36.21 |
Source: Morningstar July 31, 2024. Past performance is not indicative of future results.
Investors in ZLB and ZLU have historically participated in gains in rising markets, while shielding themselves from sharper declines when the market drops. Investors may consider both ETFs as core equity positions, or as complements to broader market holdings during periods of greater uncertainty, where a more defensive portfolio may be appropriate.
Performance
Fund Name |
Ticker |
Max |
Year-to |
1-Year |
3-Year |
5-Year |
Since |
Annualized |
Inception |
0.35 |
11.63 |
14.73 |
7.98 |
9.44 |
12.00 |
2.42 |
21-Oct-11 |
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0.30 |
14.56 |
14.40 |
9.43 |
9.24 |
13.74 |
2.07 |
19-Mar-13 |
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0.30 |
9.95 |
9.27 |
5.79 |
8.26 |
10.82 |
2.06 |
19-Mar-13 |
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0.30 |
9.82 |
8.62 |
5.23 |
7.48 |
8.76 |
2.25 |
10-Feb-16 |
Source: Bloomberg, as of July 31, 2024.
1 Bloomberg August 7, 2024.
2 Morningstar Direct as of July 31, 2024. Based on the Morningstar Category, Canadian Equity and U.S Equity Fund.
3 Beta: A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.
4 An upside capture ratio of 100 or more indicates a fund has generally met or outperformed the benchmark during periods of positive returns for the benchmark. A downside capture ratio of less than 100 indicates that a fund has lost less than its benchmark in periods when the benchmark has been in the red.
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Changes in rates of exchange may also reduce the value of your investment.
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