It was a summer rife with stress and uncertainty in the Eurozone. And of course markets gyrated accordingly, with the MSCI World index falling nearly 10% during Q3. Pension assets in Canada tumbled accordingly, down 5.5% in the quarter ending September 30,2011 according to a survey by RBC Dexia Investor Services – the poor quarter even dragged year-to-date performance into negative territory: -3.2%.
That kind of volatility has made this an ideal time for pension funds to look at a host of new low volatility strategies available in the institutional space. They’re compelling for plan sponsors seeking to build resilient equity portfolios that can both outperform and take on less risk than traditional equity managers. These days slow and steady wins the race in the pension world.
ETF providers have pulled a page out of the institutional playbook by introducing a series of new low volatility products. These ETFs have shares in stocks with steady returns in most kinds of markets – consumer staples and utilities. Even in the darkest of economic times, people like to drink beer and keep the lights on, right? These ETFs also integrate other stock selection methods like momentum and beta to deliver returns without the volatility.
BMO, iShares, Invesco and Russell have all begun offering low volatility ETFs to investors looking to shed exposure to volatility risk.
Of course, what happens when markets turn bullish is another story – low volatility funds certainly can’t keep up. In fact, Morningstar ETF analyst Sam Lee recently noted that “a low volatility strategy in the nineties would have underperformed the market by well over 10 per cent annualized”.
But for investors looking to get defensive with at least part of a portfolio, low volatility ETFs could be a good start. Could low volatility ETFs work for pension funds? Probably not at the moment (unless of course they could be used as a temporary “liquidity sleeve” for fund transitioning to and from low volatility products). But it is always nice to see retail providers mirroring the pension space to offer them cheap and easy ways to manage market volatility in tough times.