Exploiting the low volatility anomaly

Eric Falkenstein has described the concept for low volatility (low beta) investing through his book, blog and website.  There are several ETFs available such as SPLV.  Personally, I find the concept and results fascinating.

I used Eric’s historical data to test the effect of holding a low beta instrument outside of recessions:  Results are not quite as smooth as the momentum test but bear in mind that this is a single instrument.  There may be an opportunity to improve with either Robeco enhanced funds (if accessible) or a universe of low vol. ETFs ranked by momentum.  There is some yield which boosts returns slightly also.

Annual return 19%, max. peak to trough drawdown 15%, Sharpe 2.

blog figs

‘Timing the dips’ (buying when >1% stocks down >25% in a month) results in:

Annual return 16%, max. peak to trough drawdown 7%, Sharpe 2.6 (Exposure 50%)

Trade Date Price Ex. date Ex. Price % chg
Long (profit) 8/8/2003 99.4 10/31/2003 113.5 14.19%
Long (profit) 4/30/2004 131.1 12/23/2004 155 18.23%
Long (profit) 4/1/2005 163.2 9/16/2005 180.8 10.78%
Long (profit) 10/21/2005 171.4 2/24/2006 197 14.94%
Long (profit) 7/28/2006 181.5 1/26/2007 210.5 15.98%
Long 7/27/2007 224.7 9/28/2007 223 -0.76%
Long 3/13/2009 137 5/8/2009 150.9 10.15%
Long 7/2/2009 156 8/28/2009 165.6 6.15%
Long (profit) 11/6/2009 170 4/16/2010 195.7 15.12%
Long 5/7/2010 185 3/4/2011 208.1 12.49%
Long (profit) 3/18/2011 204.6 7/1/2011 232.1 13.44%
Long 8/19/2011 203.8 11/11/2011 217 6.48%
Long 12/2/2011 214.2 2/17/2012 225.3 5.18%
Long 5/25/2012 233.1 7/6/2012 243.1 4.29%
Long 8/10/2012 242.3 8/31/2012 244.2 0.78%
Open Long 11/2/2012 244.6 3/1/2013 265 8.34%
Advertisements

4 thoughts on “Exploiting the low volatility anomaly

  1. Not clear what your entries and exits were determined by… It does not seem to follow only the recession timetable (only?)

    • Wray, same as the previous tests with 6xATR profit target and the breadth based exit.
      I just checked using the recession timetable only: annual return 17.3%, max. DD 15.0%

  2. Pingback: Momentum Investing: Instrument selection is critical | RRSP Strategy

  3. Pingback: XIV! | RRSP Strategy

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s