Low-volatility funds can help you ride out the ups and downs of foreign markets.
Foreign stocks have taken investors on a harrowing ride in recent years. That has left many investors believing that the risk in international markets outweighs the reward. But a growing number of funds that focus on low-volatility stocks offer wary shareholders a low-risk way to approach these uncertain markets.
Chances are you’re light on international stocks, given the long bull market in U.S. stocks. The average American stock portfolio holds 30% in foreign stocks, says Fran Kinniry, head of Vanguard’s investment strategy group. But international firms make up half of the world’s total market value. And, Kinniry says, many investors don’t own any international stocks. “We’d rather see more of those investors put their toe in the water and boost their foreign stock exposure to 10% to 20% than debate whether 30%, 40% or 50% is better,” he says.
Low-volatility funds offer a smoother path to international markets. “Smoothing the ride helps investors stay invested longer and stay true to their goals,” says Holly Framsted, head of smart-beta ETFs at BlackRock’s iShares.
The benefits of low-volatility investing came to light decades ago. Researchers found that the traditional thinking—that the more risk you take on, the bigger the reward— didn’t hold true when it came to volatility. In fact, high-volatility stocks lagged the market over time, and low-volatility stocks— deemed less risky because they exhibit less price variability than the average stock—outperformed over the long haul. “You earn better risk-adjusted returns with less-volatile stocks,” says Ryan Issakainen, ETF strategist for First Trust. “A bunch of behavioral reasons explain this, but the empirical evidence is there.”
Winning more by losing less.
Over short periods, the returns of low-volatility stocks typically fail to match their benchmarks— in both up and down markets. New research from S&P Dow Jones Indices confirms earlier studies: Low-volatility stocks outperform other stocks in down markets far more than they lag in up markets.
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