Listen, BlackRock’s head of iShares smart beta Rob Nestor thinks maybe you’re on some “odd-ball” shit if you’re asking questions about the extent to which low-vol. products might be prone to underperforming the broader market in a drawdown catalyzed by a concurrent selloff in bonds and stocks.
I mean yes, it would appear to make complete sense to ask whether those funds would be prone to underperformance in a situation where stocks are selling off in response to rapidly rising yields because after all, if you just go out and you pick low volatility stocks without thinking, you might end up with a pretty big allocation to bond proxies, but again, you have to understand that those are the kinds of conclusions “odd balls” would draw, and you’re not an “odd ball”, are you?
Two “odd balls” are Bloomberg’s Carolina Wilson and Dani Burger who, in a new piece, suggest that “a blemish has appeared on what had been one of the hottest trades among quantitative investors — low volatility.”
See the thing is, low vol. ETFs didn’t really offer much in the way of a cushion during the recent market turmoil and the reason is simple: they’re vulnerable in a situation where the correlation between stock and bond returns flips positive. So basically, they’re vulnerable for the same reason balanced portfolios and risk parity took a dive:
“Many of these funds significantly overweight bond proxies and although those holdings have traditionally worked well in selloffs, as rates rally one should expect those beneficial correlations to break down,” Moors & Cabot’s James Pillow told Bloomberg for the article linked above, adding that “as with many specialty ETFs, they more often than not fill an emotional need and not the actual need.”
Imagine that! These “smart” beta funds are largely useless and really don’t do much other than make the people who are duped into buying them feel “smart.” Who could have seen that coming besides everyone who’s been saying exactly that about smart beta since it first became a buzzword.
Here’s the “odd ball” quote from Nestor (BlackRock issues iShares Edge MSCI Min Vol U.S. ETF or, as you probably know it: USMV):
We always frame it terms of months and years instead of days and weeks. Because of stock-specific drivers, when you look at any given day or week, you see what appear to be odd-ball circumstances.
Yeah, “odd-ball” circumstances. And by “odd-ball circumstances” he means the circumstances that the people BofAML polls for the bank’s global fund manager survey have been warning about for months:
So what does “odd-ball” look like? Well it looks like this:
Basically, SPLV didn’t do much for you relative to just holding SPY during the week when the VIX spiked the most on record. Hmmm. That’s “odd”…. “ball”(s).
But again, Nestor thinks you have to look at this in terms of years and months, but as it turns out, if you pan out what you discover (to exactly no one’s surprise) is that SPY outperforms SPLV when yields are rising: