Are low-volatility ETFs losing their luster?

Low-volatility ETF products may be facing their inevitable down cycle in the face of changing investor preferences

As investors have started shifting their assets from bonds to stocks, a similar move from low-risk to high-growth seems to be happening in the Canadian ETF markets, according to the Globe and Mail.

Comparing the BMO Low Volatility Canadian Equity ETF (ZLB) with the BMO S&P/TSX Capped Composite Index ETF (ZCN), columnist Rob Carrick noted that while ZLB’s 5-year cumulative return to Nov. 24 was 85.5% compared to ZCN’s 32.3%, ZLB’s 12-month return of 5.5% lagged ZCN’s performance of 12.3%.

“[I]nvestors were feeling nervous after the market crash of 2008-09 and gravitated to the kind of stable blue chip dividend stocks that began turning up in low-volatility portfolios [for years],” Carrick wrote. “These stocks soared in price and took low volatility funds along with them.”

The past year has seen a change in investor appetite from risk aversion to growth preference. Investors have been selling blue-chip dividend stocks that have served them well for years, moving to stocks that offer more capital gains potential. “Year to date, the top performing sector on the TSX is the decidedly dividend-unfriendly materials sector,” Carrick wrote. “Next is energy, another growth-oriented sector.”

A more recent shock that may have influenced the shift is the US election’s outcome. The resultant surge in bond yields may have hurt dividend stocks in sectors such as utilities, pipelines, telecoms, and real estate. In addition, confidence in a US economic revival driven by president-elect Trump’s fiscal policy and deregulation plans have also dampened attitudes toward low-volatility stocks.

“Low volatility ETFs are widely available and have attracted billions from retail investors who loved the idea of tamping down risk while trouncing the broader stock market… But it’s now becoming apparent that low volatility is a strategy like any other – it will have both up and down cycles,” Carrick wrote.

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