Your cart is currently empty!
Low-Volatility Stocks: How To Find and Invest in Them
Conversely, if you determine where implied volatility is relatively low, you might forecast a possible rise in implied volatility or a reversion to its mean. Time value is the additional premium that is priced into an option, which represents the amount of time left until expiration. The price of time is influenced by various factors, such as the time until expiration, stock price, strike price, and interest rates.
- For instance, the top holding within the NIFTY 50 has a 9 to 10% weightage and then it keeps on reducing gradually.
- Long-term buy-and-hold investors, however, often prefer low volatility where there are incremental, steady gains over time.
- The information presented does not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy or investment decision.
- Thus, stocks that go up will go down and everything that will go down will go up.
And that is the reason why this index is rightfully tagged as one having Very High Risk in the SEBI defined riskometer. But when we use both these strategies with 50% weightage to the momentum index and 50% to the low volatility index, it shows that the combination would have done even better than the standalone strategies. The combination would have outperformed the NIFTY 50 in 12 out of the last 15 years. Most specifically, look at the years 2008, 2011, and 2015 which were negative years for most major indices. The data here shows that the LV30 index strategy has done really well and has delivered an alpha of 9 to 13% in those years.
A higher volatility means that a security’s value can potentially be spread out over a larger range of values. This means that the price of the security can change dramatically over a short time period in either direction. A lower volatility means that a security’s value does not fluctuate dramatically, and tends to be more steady.
While this trail may be less exciting, there is a much lower chance of getting injured or hurt. Lisa currently serves as an equity research analyst for Singular Research covering small-cap healthcare, medical device and broadcast media stocks. DG’s dividend isn’t much to look at, at 0.7% in yield, but it’s growing it at a rapid rate. Dollar General bumped its payout 12.5% higher this year and 10.3% last year.
The longer the time frame, the more likely it is you’ll see this relationship hold. Indeed, from November 2011 (the first full month following USMV’s inception) through May 2021, USMV and SPLV had respective downside-capture ratios of 62.8% and 60.8% versus the Morningstar US Market Index. This is most evident in the downward slope of the line that spans the better part of the 1990s and more recently in the post-pandemic rebound.
Is Volatility the Same As Risk?
Such strategies include buying calls, puts, long straddles, and debit spreads. With relatively cheap time premiums, options are more attractive to purchase and less desirable to sell. Many options investors use this opportunity to purchase long-dated moving average crossover options and look to hold them through a forecasted volatility increase. Just don’t consider low-volatility stocks a panacea for whatever ails the market. Over shorter time periods, low-vol stocks have sometimes underperformed, including in 2020.
That’s in part because of the fact that power and water are necessities for businesses and consumers alike, with strong baseline demand in any market environment. But the solid nature of utilities is also reinforced by structural factors that include strict regulatory oversight, regional monopolies in some markets, and high barriers to entry from competitors. Right now, leading positions in SPHD include AT&T (T) and Verizon Communications (VZ), both blue chip stocks from the telecom industry, and real estate investment trust (REIT) Simon Property Group (SPG). These picks are representative of the approach of this low-volatility ETF, as it buys into large and entrenched companies with a strong history of dividends. Right now, the breakdown by country is China (22%), followed by India (20%) and Taiwan (16%). By individual holdings, top stocks are the state-run Bank of China and Taiwan’s Chunghwa Telecom (CHT).
However, I’m sorry to say low-vol stocks still might be of use this year, for several reasons. “When the market is down, pull money from those and wait for the market to rebound before withdrawing from your portfolio,” says Benjamin Offit, CFP, an advisor in Towson, Md. While heightened volatility can be a sign of trouble, it’s all but inevitable in long-term investing—and it may actually be one of the keys to investing success.
Volatility: Meaning In Finance and How it Works with Stocks
If you need your funds in the near future, they shouldn’t be in the market, where volatility can affect your ability to get them out in a hurry. But for long-term goals, volatility is part of the ride to significant growth. At the height of the market in mid-February 2020, utilities and real estate stocks made up nearly 47% of SPLV’s portfolio.
The Bottom Line on Market Volatility
They can use several different tools to help
them choose the type of security that fits their risk profile and
investment goals. The leading criteria used to identify low volatility stocks is a beta
value under 1.0. In sectors that carry more risk, an investor could
compare the beta of several companies and look for those with a lower
beta than the rest. “We look for long-term earnings and share price gains to be driven by product innovation, productivity improvements, and better advertising,” says Argus Research analyst Taylor Conrad (Buy). But that’s the risk you take with these strategies, including with equities and low-volatility ETFs. If you hold low-vol stocks and chaos arrives, chances are they’ll buoy your performance – but if there’s no tumult and stocks broadly ascend, those low-vol holdings could lag.
The company recently took a major step in boosting its presence in emerging markets by acquiring Softex Indonesia, a leading diaper maker serving Southeast Asia. At least one-quarter of the world’s population uses Kimberly-Clark products, and the company holds either No. 1 or No. 2 worldwide market shares in diapers, feminine care and bathroom tissue. The pandemic has spurred demand in 2020 for the company’s line of KC Professional brands, which include tissues and paper https://traderoom.info/ towels designed for away-from-home use, sterile wipes and various other safety products. “This defensive diversification coupled with possible LT consumption changes and favorable shelf-reset comps should help offset pressures from H2 pantry deloading.” Dividend yields are calculated by annualizing the most recent payout and dividing by the share price. Stocks listed in order of beta, from highest to lowest (a lower beta means a stock is theoretically less volatile).
Related investing topics
The concept of low volatility investing is based on cushioning the potential damage of a sudden market downturn. In other words, the objective here is not to give an aggressive top-of-the-chart performance. However, that does not mean that the LV30 index can be positioned as a balanced fund either. A stop-loss order is another tool commonly employed to limit the maximum drawdown.