Why the Volatility Spike is the Low Volatility Strategy’s Best Friend
The first half of 2019 saw one of the biggest rallies in the domestic market; the S&P 500® rose 18.54% on a total return basis despite concerns of slow economic growth, a trade war, and a possible rate hike. During the same period, the S&P 500 Low Volatility Index surprised the market and rose even more. The index outperformed the broad market by 99 bps in the first six months, and 90 bps in the second quarter.
The S&P 500 Low Volatility Index generally tends to outperform in down markets and underperform in up markets. However, the first half of 2019 reminds us that, as its name would suggest, the S&P 500 Low Volatility Index’s outperformance partly comes from its ability to reduce volatility drag. As a result, it may even beat the market when it zigzags on its way up.
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