BMO recently introduced a mutual fund option for their Canadian low volatility index. They have that available in ETF form by way of the ticker ZLB. That fund has an incredible short-term history of beating ‘the market’ and also delivering much better risk adjusted returns.
I saw this piece on Investment Executive, New fund offers growth with less risk. And hey, isn’t that what most investors are looking for? Very few of us truly embrace volatility, even in the accumulation stage when those lower prices are great for our longer term total return prospects. So many investors have told me that they would take lesser returns for a more easy ride. That’s why most investors will choose that Balanced or Balanced Growth model.
As I observed in this post in January, Canadian ETF investors do sit comfortably in that sweet spot.
Using a lower volatility index can potentially lower the risk profile even to a greater degree compared to using bonds exclusively. You can certainly combine lower volatility equities with those bonds that work like shock absorbers. My readers will know that I am a fan of, and I do acknowledge smart beta or factor investing. Lower volatility index investing is one of the core approaches that has been well studied. It is a misstatement that we have to always take on more risk to get greater returns.
The low volatility fund has delivered on its promise
Courtesy of portfoliovisualizer.com here’s the lower volatility ZLB fund as portfolio 1 vs the core index fund XIC from iShares as Portfolio 2.
We see incredible outperformance, plus much less volatility (as advertised) and much lesser draw down (decline) in the modest stock market pull backs into 2016 and the Mr. Grinch Christmas Correction of 2018. That Sortino ratio frames that level of better risk adjusted returns. Again, holders of this fund have experienced much less price risk and have been rewarded with greater total returns.
Here’s the returns by calendar year.
What’s incredible is not perhaps the lesser declines of ZLB in years of negative declines, but the outperformance in years of positive returns. The fund has been firing on all cylinders.
The index methodology
The key components are large cap and lesser volatility. It is rules based, but in the end it is the market makers that decide what stocks will make their way into the index and into the fund. It is the active managers who do the majority of buying and selling of the individual Canadian stocks. These are the large cap holdings where the active managers have ‘more confidence’. They do not buy and sell them as much as other high flyers and more cyclical stocks such as energy and materials.
Here’s the sector breakdown for the fund.
I’d suggest that the fund is doing a lot of things right in Canada with respect to what works in Canada, and avoiding the cyclical crap. It’s more along the lines of the famous Connolly Report, a dividend newsletter that had a verified performance trouncing of the Canadian large cap indices.
The allocation to financials is more measured, and it allows meaningful exposure to REITs, Utilities, Consumer Staple and Communication Services. I like to call those Telco’s the new utilities. Most of us make a monthly habit of sending Bell, Telus, Rogers or Shaw too much money. Those are regular bills and services that we will not do without. Many families send those Telco’s more monies compared to heat and electricity utility payments.
On Seeking Alpha I had commented on that with My Telco’s Are Piling On The New Subscribers.
Here are the top ten holdings of ZLB.
And here is 11 – 20.
Canadian stock markets may be only a small slice of International equities, but we are unique in that we have many oligopoly sectors such as banking and financial, Telco and Grocers (with pharma retail add on) and Railways.
I have also penned on that on Seeking Alpha, on how one might create their own Canadian oligopoly or wide moat portfolio. As an add on I had also ‘included’ (remember nothing here is a portfolio recommendation) Brookfield Asset Management and Alimentation Couche-Tard as considerations. Coincidentally, you’ll find those two names in the ZLB holdings list.
All said the BMO Low Volatility fund appears to do the trick on its own and certainly with less concentration risk compared to a typical individual stock portfolio. Given that all of the oligopoly sectors in Canada beat the market, I am not surprised that this fund has demonstrated that outperformance from 2013 to date.
Lower volatility found those wider moats
I have often questioned, or joked, as to why no one has created a Canadian wide moat fund, it may be that this is ‘the answer’ to that question. The fund went looking for lesser risk and perhaps it should not be a surprise that it found those oligopolies and wider moats that can make the active managers a little less itchy on the trigger finger.
For more on factors I’d suggest that your read the author Ploutos on Seeking Alpha. You can start with his article on the low volatility effect. In that article Ploutos points to 3 decades of data that shows outperformance of lower volatility S&P 500 constituents vs the broader market.
You might access that lower volatility index by way of that ETF. If you’re a mutual fund investor you might suggest your advisor give that new mutual fund F series a look.
You can certainly invest via BMOs InvestorLine discount brokerage offering. For those investors that want a managed portfolio they might look at BMO’s Smartfolio offering. For self-directing with more robust online advice there’s adviceDirect.
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Update: There was a lot of interest in this post and on US and International versions of low volatility ETFs.
Here’s an interesting post from ETF.com as iShares US Low Volatility fund is an ETF of the week in August and attracts considerable assets. This Min Vol Fund is on a roll. There are some interesting charts in there including the style evaluation; the fund is overweight Quality, Momentum, Yield and of course that Low Volatility factor.
From that post …
USMV’s strong performance has helped pull in assets too. This minimum volatility fund has risen 17.7% year to date, compared with VOO’s 14.7% rise, proving that taking a low-vol approach doesn’t always mean sacrificing return (read: “Why Low Vol ETFs See Big Demand“).
And here’s more from BMO on their Canadian and US Low Volatility offerings.
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