By |Published On: March 10th, 2014|Categories: Low Volatility Investing|

Question: How many ETF companies are hawking “Smart” beta products that offer low volatility or low beta portfolios (we could probably throw minimum volatility in this basket as well)

Answer: All of them

Another Question: How many ETF companies are concerned about the robustness of the products they are hawking?

Answer: Not many.

Here is a simple study on the low volatility anomaly using out of sample data on the Indian stock market.

The evidence suggests the low volatility anomaly is not a panacea:

Theory suggests a direct relationship between risk and return. But several empirical studies find that portfolio of low volatility stocks outperforms portfolio of high volatility stocks. This is termed as low risk anomaly. Our objective is to study whether low risk anomaly exists in India. Using data for the sample period running from January 1994 to June 2010 we find that high volatility quintile yields high return in India.

Source: http://www.iracst.org/ijcbm/papers/vol3no12014/14vol3no1.pdf

Nothing works all the time and every time, but robust alpha drivers should show some semblance of robustness in out of sample tests.

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About the Author: Wesley Gray, PhD

Wesley Gray, PhD
After serving as a Captain in the United States Marine Corps, Dr. Gray earned an MBA and a PhD in finance from the University of Chicago where he studied under Nobel Prize Winner Eugene Fama. Next, Wes took an academic job in his wife’s hometown of Philadelphia and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management firm dedicated to an impact mission of empowering investors through education. He is a contributor to multiple industry publications and regularly speaks to professional investor groups across the country. Wes has published multiple academic papers and four books, including Embedded (Naval Institute Press, 2009), Quantitative Value (Wiley, 2012), DIY Financial Advisor (Wiley, 2015), and Quantitative Momentum (Wiley, 2016). Dr. Gray currently resides in Palmas Del Mar Puerto Rico with his wife and three children. He recently finished the Leadville 100 ultramarathon race and promises to make better life decisions in the future.

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Important Disclosures

For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Third party information may become outdated or otherwise superseded without notice.  Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency has approved, determined the accuracy, or confirmed the adequacy of this article.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. Our full disclosures are available here. Definitions of common statistics used in our analysis are available here (towards the bottom).

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