Blog

Parsing Low Vol And Low Beta

May 29, 2012
Share:

Think low volatility and low beta are the same? Think again.

Russell offers two ETFs that track modified versions of the Russell 1000, one with a low-beta strategy (NYSEArca: LBTA), one with a low-volatility strategy (NYSEArca: LVOL).

Over a three-month time horizon, each of these funds delivered sufficiently divergent returns to make me want to understand what the difference means to investors.

Here’s what I found:

Over the three-month time horizon starting Feb. 17, nearly 5 percentage points of returns separated LBTA and LVOL, with LBTA eking out actual gains. As the graph below shows, LBTA finished in the black, gaining a little over 1 percent, while LVOL fell about 3 percent.

VOL vs LBTA Price Performance

A 5-percentage point difference over three months is nothing to scoff at, so it would be best to stop using “low-beta” and “low-volatility” synonymously and find out what separates these two factor-based approaches to investing.

The answer is that beta is a relative measure and volatility is an absolute measure. Let me explain.

Beta measures how much the price of an asset moves relative to the movement of the market. Volatility, on the other hand, is an absolute measure of price fluctuations in the asset and pays no regard to movements in the broader market.

We generally expect the two measures to yield similar values because most assets exhibit some significant level of correlation with measures of the “broader market.”

As an investor, if I were looking at a low-volatility portfolio I would expect to find assets that also have low betas. Conversely, inside a low-beta portfolio, I would expect to find assets that also exhibit low volatility.

As it turns out, not only is neither assumption theoretically sound, but empirical evidence also suggests the contrary.

 

ETF.COM CHANNELS

Trying to figure out alternatives ETFs? Use our alternatives ETFs channel, library and ETF screener!

Want to learn more about smart-beta ETFs? Check out our smart-beta guide, essentials library and ETF screener!

ETF DAILY DATA

A roster of U.S. fixed-income ETFs topped the list of ETF creations Monday, Aug. 31, as investors poured $1.2 billion into the segment.

'SPY' paced State Street's issuer-leading inflows Monday, Aug. 31, as total U.S.-listed ETF assets hit $2.029 trillion.

ETF.COM ANALYST BLOGS

By Dave Nadig

With many ETFs currently trading well off fair value, what’s an ETF investor to do? Don’t panic.

By Matt Hougan

Out-of-favor funds can bring attractive returns.

By Matt Hougan

New data from Charles Schwab show that the death of mutual funds is happening faster than we thought.

By Dave Nadig

Grab the popcorn. Precidian just doubled-down on its nontransparent active ETF proposal with the SEC this morning.

ETF INDUSTRY PERSPECTIVE

By John Del Vecchio

An index that goes long financially sound companies and shorts the ones with problematic balance sheets.

By Dan Draper

The nature of retirement is changing. How can investors adapt?

By Invesco PowerShares

A more in-depth look at the smart-beta survey's results.