We have all grown with the idea that future long term returns of equities are governed by CAPM, later modified by Fama: returns are a function of risk (beta), size, and value. However, in recent studies you read that there is a persistent anomaly, that long term returns seem to be higher with lower beta instead of the CAPM's prediction, see http://papers.ssrn.com/sol3/papers.cfm? ... id=2055431.
If I understand well the most common explanation is the overwhelming tendency of active mutual fund managers (who control the market by their large purchasing volumes) to preferentially trade risky stocks, tending to push prices of high beta stocks up.
Based on this concept, a new breed of minimum volatility ETFs has emerged. It appears that you can have the cake and eat it too, or can you?: about 1/3 lower risk than the standard market cap ETFs and higher returns! See http://etfdb.com/type/investment-style/low-volatility/ for a list of these ETFs
So, how come I do not see Bogleheads running to modify their portfolios to these new instruments????
What about Minimum Volatility Equity ETFs??
Re: What about Minimum Volatility Equity ETFs??
Looking at SPLV, USMV over the last 1Y they trail S&P 500 by about 8% and they don't look a lot less volatile to me.
I guess their better risk/return will only show up over a full market cycle.
I guess their better risk/return will only show up over a full market cycle.
Re: What about Minimum Volatility Equity ETFs??
I am in this space ... but before you jump in I strongly suggest reading up on the Wiki. You need to understand the difference between low vol and min vol. I own min vol (ACWV and VMNVX). The two are related, but low vol lowers returns by loading up on utilities, min vol caps any one sector. If you move into this space, you cannot second guess your self. I suspect timing these things based on recent performance will go very badly. (you will move back to cap weighted index at exactly the wrong time).
I like the headline of a picture on this linkhttp://www.bogleheads.org/forum/viewtop ... 0&t=130518 ... not very detailed.
You should note when you will underperform and anticipate your reaction ... as noted by Waba
You may want to compare USMV and SPLV to SPY over the life of the fund. USMV outperforms the others - particularly on a risk adjusted basis, SPLV underperforms the others. That said, SPLV (based on Wiki) has better performance. Much of the last year is associated with the rise in interest rates.
Comparing EEMV to EEM or ACWV to ACWI also provides some light. EEMV and ACWV (min vols) over life of fund greatly underperformed! The last two years paint a different picture.
I like the headline of a picture on this linkhttp://www.bogleheads.org/forum/viewtop ... 0&t=130518 ... not very detailed.
You should note when you will underperform and anticipate your reaction ... as noted by Waba
Do note that the cap weighted index fund pays less in dividends, so that explains some, but not all of the difference. They are less volatile.Waba wrote:Looking at SPLV, USMV over the last 1Y they trail S&P 500 by about 8% and they don't look a lot less volatile to me. I guess their better risk/return will only show up over a full market cycle.
You may want to compare USMV and SPLV to SPY over the life of the fund. USMV outperforms the others - particularly on a risk adjusted basis, SPLV underperforms the others. That said, SPLV (based on Wiki) has better performance. Much of the last year is associated with the rise in interest rates.
Comparing EEMV to EEM or ACWV to ACWI also provides some light. EEMV and ACWV (min vols) over life of fund greatly underperformed! The last two years paint a different picture.
"Owning the stock market over the long term is a winner's game. Attempting to beat the market is a loser's game. ..Don't look for the needle in the haystack. Just buy the haystack." Jack Bogle
Re: What about Minimum Volatility Equity ETFs??
For the market to have charitably left us a big fat free lunch here: a) Historical patterns must repeat, and b) The academic backtests have to be reproducible given real world trading, liquidity, and other constraints. Hoping for these conditions is likely to lead to disappointment.mpt follower wrote:So, how come I do not see Bogleheads running to modify their portfolios to these new instruments????