Understanding Factor Investing
Low Volatility Factor Strategies
What Is Low Volatility Investing?
Low Volatility investing focuses on assets with lower price volatility and steadier performance, aiming to capture consistent returns with lower risk. This strategy targets companies that exhibit stable earnings and tend to perform well during market uncertainty or downturns.
Low Volatility-based strategies are particularly appealing for risk-averse investors who seek to reduce portfolio drawdowns.
How It Works
Securities selected through Low Volatility strategies tend to have higher dividend yields and lower beta relative to the broader market, offering resilience in uncertain market conditions.
- Security Selection: Focuses on low volatility assets with consistent performance and earnings stability.
- Screening Metrics: Volatility of returns and equity beta.
- Investment Horizon: Typically long-term, with a focus on steady, lower-risk growth.
Potential Benefits of Low Volatility Investing
- Lower Risk: Targets securities with lower price volatility and equity market beta.
- Consistency: Aimed at producing steady returns in both up and down markets.
- Capital Preservation: Helps protect capital during periods of heightened market risk.
- Defensive Nature: Particularly effective in “risk-off” market environments.
Key Risks
- Underperformance in Bull Markets: Low-volatility stocks may lag during strong market rallies driven by high-risk, high-growth stocks.
- Sector Concentration: Low Volatility strategies often favor defensive sectors like utilities, healthcare, and consumer staples.
- Growth Limitations: Investors may miss out on more aggressive growth opportunities.
Low Volatility vs. Other Factors
Low Volatility is often combined with other factors like Value and Momentum strategies in an effort to create a low-risk, well-balanced portfolio.
| Feature | Low Volatility | Value | Momentum |
|---|---|---|---|
| Basis | Low price fluctuations | Undervalued stocks | Recent price performance |
| Ideal Environment | Market uncertainty, risk-off periods | Recovery or expansion | Trending markets |
| Risk Profile | Low | Moderate | Higher |
| Turnover | Low | Low | Higher |
Source: AQR. For informational purposes only. The comparisons herein are not exhaustive and do not address all relevant features, risks, or considerations associated with the strategies discussed. Investors should conduct their own due diligence before making any investment decision.
Who Typically Uses Low Volatility Strategies?
- Risk-averse investors.
- Conservative equity investors seeking consistent returns.
- Investors looking for lower risk during market uncertainty.
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DISCLOSURES
Investors should carefully consider the investment objectives, risks, charges and expenses of the Funds before investing. To obtain a prospectus or summary prospectus containing this and other important information, please call 1-866-290-2688 or click here to view or download a prospectus online. Read the prospectus carefully before you invest.
The information contained on this website has been provided solely for information purposes and does not constitute an offer or solicitation of an offer, or any advice or recommendation, to purchase any securities or other financial instruments, and may not be construed as such. The information on this site is directed only at persons or entities in any jurisdiction or country where such access to information contained on this website and use of such information is not contrary to local law or regulation. Accordingly, all persons who access this website are required to inform themselves of and to comply with any such restrictions. Past performance is not a guarantee of future performance.
There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially and should not be relied upon as such.
View definitions of benchmarks and other terms used here.
The investment strategy and themes discussed herein may not be in the best interest of investors depending on their specific investment objectives and financial situation.
Diversification does not eliminate the risk of experiencing investment losses. There is a risk of substantial loss associated with trading commodities, futures, options, derivatives and other financial instruments. Before trading, investors should carefully consider their financial position and risk tolerance to determine if the proposed trading style is appropriate. Investors should realize that when trading futures, commodities, options, derivatives and other financial instruments one could lose the full balance of their account. It is also possible to lose more than the initial deposit when trading derivatives or using leverage. All funds committed to such a trading strategy should be purely risk capital.
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