What are we looking for?
Last week, Standard & Poor’s and the Toronto Stock Exchange unveiled two new indexes based on the S&P/TSX composite index – one to track the lowest-volatility members of this Canadian benchmark, and one to track its highest-beta members. The new indexes have been licensed to PowerShares Canada – with an eye on creating exchange-traded funds based on them.
Inspired by the new indexes, and the likelihood we could all soon have a chance to invest in them through ETFs in the not-too-distant future, we thought we’d take a look at the stocks that lead these indexes – starting today with Low Volatility.
S&P/TSX low volatility
The S&P/TSX Composite Low Volatility index is made up of the 50 S&P/TSX composite stocks with the lowest volatility measures. Volatility is defined as “the standard deviation of the security’s daily price returns over a one-year trading period.” In other words, these are the stocks whose prices gyrated the least on a day-to-day basis over the past year.
The 50 stocks are not equally weighted on the index, nor are they weighted by market capitalization. Rather, they are weighted based on their volatility – the least volatile stock gets the highest weighting. S&P will rebalance the index quarterly.
Since we don’t have space here to show you the entire index, we have produced a table of the 20 least-volatile stocks on the list – which are also the 20 least-volatile stocks on the S&P/TSX composite. We have listed them in order of index weighting – which, due to the weighting system, means they are ranked here based on lowest volatility.
What we found
The list is dominated by many of the traditionally defensive sectors in the stock market – REITs, utilities and consumer staples. These sectors are often considered safe harbours in times of volatile and uncertain markets.
In its back-testing of the Low Volatility index, S&P found not only that its risk levels were historically lower than the S&P/TSX composite, but that its total returns consistently outpaced the broader market. Its one-year return was 9.9 per cent on a total-return basis, compared with a 9.4-per-cent decline in the S&P/TSX composite, and its three-, five-, 10- and 15-year annualized returns all beat the composite benchmark.
However, in a booming market, the Low Volatility index can lag the broader index. In 2009, for example, the Low Volatility total return was 19.2 per cent, compared with 26.5 per cent for the S&P/TSX composite.