But the deluge of cash may be jeopardizing a central premise of the strategy -- that tranquil stocks are undervalued. The price-to-earnings multiple of the S&P 500 Low Volatility Index sits near its highest since at least 2013, even if it has come down from its 2017 peak.
“It’s hard to argue that you are getting a particularly inexpensive entry point, which may dent your longer term returns from the factor,” said Will Hobbs, chief investment officer at Barclays Investment Solutions in London.
Even Sanford C. Bernstein Ltd., which recommends the shares for investors convinced January’s rally was a dead-cat bounce, concedes the “valuation case is less clear in the U.S. than it is globally or in Europe.”
Rate Risk
Another vulnerability is rising interest rates, thanks to low-volatility shares’ elevated exposure to bond proxies like utilities and high-dividend payers. While the Fed might have put to rest fears of an imminent rate hike for now, there’s little consensus around the view that borrowing costs will remain depressed for much longer.
“As real safe-haven yields move higher, you tend to find that the relative appeal of other income strategies can wane a bit,” said Barclays’ Hobbs.
Seeking out low-volatility stocks with high-quality balance sheets is important “because many low-vol names are exposed to high leverage, like utilities and telecoms,” which can make them sensitive to higher rates, said Roland Kaloyan, the head of European equity strategy at Societe Generale SA.
Perhaps the most important message is that investors shouldn’t rely on low-volatility strategies to the exclusion of everything else, according to Willem Sels, the chief market strategist at HSBC Private Bank. He recommends focusing on quality, while also holding some U.S. growth and low-volatility shares.
“There’s a lack of visibility and high uncertainty in the market, people lack conviction,” said Sels. “You need to be balanced in this environment. You can’t be a single-factor investor.’’
This article provided by Bloomberg News.