New index ETFs add a twist to low-vol factor by focusing on reducing downside volatility
CI Global Asset Management (CI GAM) has made its first product-expansion move for 2023 by unveiling two new volatility-mitigating ETF strategies.
The firm has launched CI Global Minimum Downside Volatility Index ETF (CGDV) and CI U.S. Minimum Downside Volatility Index ETF (CUDV), with unhedged units also available for both strategies (CGDV.B and CUDV.B, respectively).
“These new ETFs kick off what will be another dynamic year of product innovation and development at CI GAM,” said Roy Ratnavel, EVP and head of Distribution for CI GAM.
The two ETFs are meant to replicate the performance of indexes provided by Solana, which each track a diversified portfolio of companies with lower downside volatility than their corresponding broad equity benchmark. According to Ratnavel, they’re designed to deliver a smoother journey to better overall long-term returns.
“By focusing on companies with strong performance during market downturns, these mandates can play defence for investors’ portfolios,” Ratnavel said. “And because these ETFs seek to minimize downside volatility – as opposed to total volatility – they’re also well positioned to benefit from rising markets.”
According to the latest annual Canadian ETF Flows report by National Bank, low volatility ETFs have gone through a three-year outflow streak since onset of the pandemic in 2020. Prior to that, the category saw five years of continuous inflows.
Low-volatility ETFs have seen blips in favour in recent months, including this past December, and they outperformed the broad market benchmark in 2022. Nonetheless, investors have decreased their net holdings of these funds.
Low-volatility stock investment has traditionally excelled across several rolling time periods, according to research, and this difference has been statistically significant. There are several theories as to why low volatility investment strategies perform better.
Stocks with low volatility often represent mature, reliable businesses with sound financial positions, steady profitability, and positive cash flows. As a result, they offer good exposure to the profitability and investment risk variables.
By reducing the negative consequences of significant compounding losses, low-volatility equities benefit from the correlation between geometric and arithmetic returns. Additionally, low-volatility equities frequently trade at a discount to their intrinsic value and, given the value risk factor, may provide a larger return.
