Blitz also found that on a value-weighted basis, large-cap low-volatility strategies have a similar (or slightly lower) average return than the market, over the entire sample period and also during each subperiod. But their volatility was about 20% below that of the market. He writes: “As a result, the Sharpe ratios of the large-cap low-volatility strategies are consistently higher than those of the market, which confirms the existence of a low-volatility effect.”
When examining small-cap stocks, Blitz found: “The small-cap low-volatility strategies also exhibit consistently higher Sharpe ratios, in fact even more so than their large-cap counterparts, but mainly because of their high mean return. The volatility of the small-cap low-volatility strategies shows a mixed picture, being higher than the market in some instances, and lower than the market in other instances.”
Low-Volatility Factor Separate From Value
Blitz further found that three-factor alphas for various low-volatility strategies “are all significant at the 1% level over the full-sample period from January 1929 to December 2014.” Thus, their alphas were all significant after controlling for the beta, size and value factors. In addition, he found that the loading on the value factor varied significantly over time. This reflects an important point we’ll discuss later on.
Finally, Blitz concluded: “The low-volatility effect is a distinct phenomenon which cannot simply be dismissed as another manifestation of the value effect. Comparing the results for the two effects, it seems that the combined evidence for the low-volatility effect is at least as strong as that for the value effect, or perhaps even stronger.”
He added: “Instead of choosing between harvesting either the value premium or the low-volatility premium, investors should simply benefit from both. The two factors are distinct phenomena, and the results in this paper suggest that during prolonged periods of time when one factor fails to deliver, the other factor can provide relief.”
Before you draw any conclusions, however, it’s important to review some of the other research. Later this week, we’ll delve into additional studies on low volatility, explore whether low-volatility strategies have now become overgrazed, and take another look at low-volatility strategies’ exposure to the value factor.
Larry Swedroe is the director of research for The BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.