Surging stocks in the past 18 months have been hard on a onetime star of the ETF world.
Low-volatility exchange-traded funds had a great multiyear run, but they’ve been trounced more recently by broad indexes such as the S&P 500 and S&P/TSX Composite. Could yet another reversal be at hand?
One ETF company thinks now might be a good time to get into low-volatility stocks. Brompton Funds says in a monthly note to investors that low-volatility assets typically underperform during the sort of strong market recovery we’ve seen since spring 2020. Now, with the economic rebound from COVID-19 well under way, low-volatility stocks may be poised to narrow the performance gap.
Brompton said U.S. low-volatility stocks have historically traded at an 11-per-cent premium to the S&P 500 on a forward price-to-earnings basis. In mid-October, low-vol stocks traded at a small discount to the S&P 500.
Over the past 12 months, the S&P/TSX Composite Low Volatility Index gained 16 per cent, while the S&P/TSX Composite Index was up 23.3 per cent. A three-month view is more favourable for low-volatility investing, with the S&P/TSX low-vol index up 1.8 per cent and the Composite up 0.8 per cent. A long-term comparison shows the broader index and the low-vol index each outperforming over short periods. But when the stock markets took off in March, 2020, low-vol couldn’t keep up.
Brompton’s low-vol offering is the Brompton North American Low Volatility Dividend ETF (BLOV-T), which delivered a total return of 10.7 per cent for the year to Sept. 30. The total return for the S&P/TSX Composite over that period was 28 per cent.
BLOV’s top holdings are the type of thing you’d expect to see in an ETF targeting stocks that move around less in price than the broader market – Costco Wholesale Corp., Target Corp., Procter & Gamble Co. and Telus Corp. Close to 40 per cent of the portfolio is in consumer staples, usually a go-to sector when headwinds for stocks appear.
Low-volatility ETFs from a few different companies can be found in the 2021 Globe and Mail ETF Buyer’s Guide. Expect some fairly ugly one-year comparisons to broad market ETFs.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.