It’s Never Time to Flee A Valid Strategy
By Roger Nusbaum AdvisorShares ETF Strategist
Barron’s had an interesting take on low volatility ETFs over the weekend in an article titled Time to Flee Low Vol ETF Strategy. The general tone of the article points to the PowerShares S&P 500 Low Volatility ETF (NYSEARCA: SPLV) and its reported 25% weighting to utilities. SPLV has always had a heavy weighting to utilities ranging from 31% to 18% as I’ve seen it.
Barron’s quotes well known portfolio manager Rod Smyth as saying that right now the strategy is dangerous.
A relatively broad based fund that allocates 20-30% in one sector is always taking the same risk. In the case of SPLV, the exposure to the utility sector makes in vulnerable to rising rates as played out a year ago. What was odd about the article is that they are positing the need to flee the strategy but only mentioned the one fund. There are many other funds in the low vol space many of which have different methodologies than SPLV which means they avoid that huge sector concentration.
Smyth recommended a dividend ETF from WisdomTree that he likes but coincidentally Jason Zweig had an article up at the WSJ whose title might as well have been Time to Flee Dividend ETF Strategy (the real title was No Free Lunch in Dividend Funds).
Zweig noted that after several years of outperforming, dividend funds in general lagged behind the cap-weighted S&P 500 by 400 basis points in 2013 and are lagging a little bit behind this year.
One crucial point is that there is no investment strategy that can be the best for all times. If Zweig’s info about outperforming earlier and then lagging in 2013 and so far in 2014 is accurate then at some point the dividend funds will go back to outperforming market cap indexes. This if of course true in every logical comparison (and I guess the illogical comparisons too) like foreign versus domestic, large versus small, growth versus value and so on.
In the Seeking Alpha version of our post titled Get the Beta Right a reader asked a question that pointed to a concept I’m just starting to learn about called outcome oriented solution which as the name implies focuses on the result delivered versus a particular mix of assets. I gave the example in the comments of a 4% yield while targeting a very low and measurable volatility. A follow up question then threw in and staying slightly ahead of inflation.
To Zweig’s article; to the extent no strategy can be the best for all times, a 28% return that includes an above market dividend (without loading up on mortgage REITs and closed end funds) kind of sounds like a free lunch with dessert to me. To the reader comment above; yield, low volatility and staying way ahead of inflation (in the case of 28% as implied by Zweig for 2013) would obviously get the job done provided the investor/client has an adequate savings rate.
Once you and your clients accept that no strategy can be the best for all times (repeated for emphasis) it becomes a little easier to remain disciplined to whatever strategy that you at some point came to believe gives you and/or your clients the best chance to meet long term financial goals.
Most dividend strategies and low volatility strategies are valid long term methods along with plenty of other strategies. Of all the valid strategies that you can name; one will be the best performer for the year, next five years and next ten years. One of those valid strategies will turn out to be the worst for those respective time periods but they are all still valid and can all help achieve long term financial success.