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This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License
Article
Why You Should Prefer Low Volatility ETFs
Author(s)
Gil Cohen
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DOI:10.17265/1537-1514/2017.10.005
Affiliation(s)
Ono Academic College, Haifa, Israel
ABSTRACT
Low volatility ETFs have
become popular in recent years because of the risk return tradeoff involved in
investing in those ETFs compared to traditional index investment. This research has
examined the performance of six popular low volatility ETFs from 2012 until
2016 and compared them to their benchmarks in terms of risk and return in order
to examine whether an investor has been better off
investing in those ETFs rather than following their benchmarks. Four of the examined ETFs
invest in U.S. stocks and the other
two invest in other developed and emerging markets. The ETFs comparison has
been conducted using sharp risk-return index and the CAPM model. Results have
pointed out that not only five of the low volatility ETFs have exposed their
investors to lower risk, they have also produced higher average returns. The
advantage of investing in low volatility ETFs is prominent in the U.S. stock market. All three
sizes of stocks categories (Large, Mid, and Small Capitalization) low volatility ETFs have
outperformed their indexes bench marks in terms of risk and returns. For the
non-U.S. stock investing,
according to the CAPM model, while no advantage has been found for investing in
low volatility ETFs for developed countries excluding U.S. and Canada, significant
lower systematic risk was found for emerging markets.
KEYWORDS
low volatility ETFs, risk return anomaly, large cap stocks ETF, mid cap stocks ETF, low cap stocks ETF
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