As I blogged about just recently, passive rules-based alternative selection & weighting schemes (so-called smart beta) are coming to be accepted as being superior to traditional market-cap passive indices as an investment strategy. ZLU fills a gap in the smart beta space for US equities for an ETF using beta instead of simple price volatility e.g. funds like SPLV. Russell had some low beta US equity ETFs on the market for a while but closed them down due to lack of uptake. A mix of funds with different non-market cap weighting schemes in a portfolio is the way to go (e.g. this relatively simple smart beta portfolio), so ZLU is a useful additional component.
It is interesting to see how different market conditions in Canada vs the US are affecting low beta/volatility funds in comparison to the market-cap benchmarks. US equities have been on a tear recently as we read about all-time market highs. High beta ETFs like SPHB have been outstripping the market in the short term, such as the past 6 months, but low volatility funds like SPLV are handily ahead of both SPHB and SPY over a year or longer. The reason - SPLV doesn't spurt ahead in big leaps but its dips are much less pronounced. see the Yahoo Finance chart below. Slow and steady wins the race, huh?
Though BMO's Canadian equity low beta fund ZLB has been growing slowly since its launch in October 2011, I would have thought those return-chasing investors would have leaped on board this performance vs its market cap rival XIU.
Another interesting feature of ZLU, traded in Canadian dollars despite holdings of US traded and US-dollar denominated equities, is that it also comes in a US-dollar version traded in USD on the TSX under symbol ZLU.U. Given that ZLU and ZLU.U are in effect the same fund, just with two different prices, one in CAD the other in USD, it might even be possible to do low cost currency exchange using Norbert's Gambit as described on Financial Webring, which is often done with DLR and DLR.U.
NB I have voted with my money some time ago and own a fair chunk of ZLB and no XIU.
Stumble It!
3 comments:
I just saw some research showing how low-beta stocks tend to have higher returns than we would expect. There are still two reasons that might not be an advantage though. One is that the returns still seem to be lower than high-beta stocks. The other is that I want the different parts of my portfolio to be volatile, so I can rebalance (as long as they aren't correlated). Sometimes that means they will have bigger losses, which might allow me to buy more before they go back up.
Hi VI, From what I have seen, the low beta / low vol stocks e.g. see the website started by the late Bob Haugen where many academic papers on the subject can be found - http://www.lowvolatilitystocks.com/, the highest beta / vol stocks do not have higher returns. To get a bigger rebalancing bonus from high beta stocks, they would have to be less correlated with other asset classes than low beta stocks ... but I have not seen any comparisons in that vein that would show either yea or nay. Got any to share?
I've just seen one chart last week :) It did show a slight increase in returns for higher volatility. As long as high volatility stocks have the same correlation as other stocks, I would think you should be able to buy them lower and sell them higher if you are doing it at the right time. Any research on that subject would be interesting to see.
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