Equity strategies to consider to help weather volatility
A short walk down memory laneSome investors may recall that high quality and volatility managed strategies were praised in the aftermath of the 2008-2009 market correction because they had held up relatively well during that turbulent time. However, enthusiasm has since waned because neither high quality nor volatility managed strategies have posted exceptionally strong performance since that period. It’s true: since the market bottom in 2009, both strategies have lagged the broader U.S. stock market (represented by the Russell 1000® Index). Sources: U.S. Equity: Russell 1000 Indexes. BXM: CBOE S&P 500 BuyWrite Index The reality is that high quality and volatility managed strategies generally tend to lag during periods of lower market volatility. And that’s exactly the type of market environment investors have enjoyed since 2009. But if that is changing now – if markets are returning to a higher volatility and/or lower return environment – investors may want to reconsider their position on high quality and volatility managed investment strategies.
Historically shining in periods of low market returnsDuring periods of lower returns (defined as three-year periods when the Russell 1000® Index averages less than 5%), the Russell Defensive Index and the BXM have both posted better average returns than the broad market. Since July of 1986 (inception date of the BXM), the Russell 1000® Index has produced “low” three year returns 28% of the time. During those periods, defensive and low volatility strategies have outperformed the broad market by approximately 2% per year on average.
Historically winning in periods of higher market volatilityTo evaluate how these strategies have historically held up during periods marked by higher market volatility, we divided the market history into thirds based on the level of volatility over three-year time frames. During the periods with the “lowest” volatility, the broad market generally outpaced defensive and low volatility strategies. However, during periods with “medium” and “high” amounts of volatility, the story shifts. Defensive strategies beat the broad market in both scenarios, and low volatility strategies top both in higher volatility markets.
Historically outpacing during periods of low returns and high volatilityBased on the results high quality and low volatility strategies posted during periods of either low returns or high volatility, it should come as no surprise that these strategies have also fared better than the broad market when markets are marked by both volatility and low returns.
1 The VIX index is the commonly used name for the CBOE Volatility Index.