Why Low Vol Funds Are Bleeding

March 07, 2017

The problem, of course, is that we’ve been at extremely low VIX levels for many of the last few years, with small, notable exceptions. And that has the effect of “taking the bloom off the rose” of these strategies. So it’s not that they’re underperforming badly, they’re just not delivering on the low-vol promise.

To put the above chart in further context, on the average month where SPLV beat the SPDR S&P 500 ETF Trust (SPY), VIX averaged 18.42. On an average month where it failed, VIX averaged 15.4.

Investors Do Even Worse

The actual news for real investors is much, much worse. Let’s move VIX to the side and just look at investor behavior:

The yellow bars here represent fund flows in and out of SPLV for each month. I wish I could say I was surprised that, almost universally, investors are plowing money in when it works, and pulling it out when it doesn’t.

Those few examples going the wrong way—like in late 2011—are just as painful, because you can see the money chasing last month’s performance. But I’m not surprised, because we’ve been to this rodeo before (and I wrote about it a few months ago).

To put this in context further: On an average month where SPLV “worked,” it pulled in $10.6 million. On an average bad month, investors pulled out $1.3 million.


Maybe it’s a giant “duh” that low-volatility strategies need high-volatility markets to do well, but I’ve honestly never really thought about it.

The moral of the story is that when you’re considering any factor investment—whether that’s a value fund or a momentum fund, or anything in between—ask yourself when and why you expect it to work.

No factor or strategy always works. But if you don’t know when and why, maybe it’s time to have second thoughts.

At the time of writing, the author held none of the securities mentioned. You can contact Dave Nadig at [email protected].


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