By Shirley Won
Low volatility funds are the newer kids on the block, garnering attention as investors grow weary of wild market swings.
In the past five years, the Canadian investment industry has launched mutual funds and exchanged-traded funds [ETFs] designed to help investors sleep better at night. They hold low-volatility stocks and provide a smoother ride than most of their equity peers. While returns have been impressive – particularly in market downturns – the strategies of these funds are not all alike, and some have drawbacks.
…Dave Paterson, a mutual fund and ETF analyst with D.A. Paterson & Associates Inc., was “pleasantly surprised” by how low-volatility funds performed during this past summer’s sharp market tumble, but he is not ready to embrace them wholeheartedly. He is concerned about the higher valuations of the stocks in their portfolios, and a lack of a long-term history.
“I am not sure I would recommend any of them right now in the mutual fund space because of the [short] track record,” he said. He would still prefer other mutual funds run by managers who are very defensive, and invest in high-quality names that are “less likely to bear the full brunt of any market selloff,” he said.
Among these funds are the Fidelity Canadian Large Cap, Cambridge Canadian Equity, Mackenzie Ivy Foreign Equity and Franklin U.S. Rising Dividends.
Among ETFs, however, he is comfortable with recommending the BMO Low Volatility Canadian ETF, and iShares MSCI EAFE Minimum Volatility ETF. Still, he would not jump into low volatility ETFs with both feet.
“There have been a lot of back-test data to show it [the strategy] works, but we only have a relatively limited real-time record,” Mr. Paterson said. “In the context of a portfolio, I would be looking to use these as a portion of my equity allocation. I would not use it as a core, though.”