Low volatility investing has generated superior risk adjusted returns over the long-term period and has gained the status of a premium market anomaly. Low volatility factor strategies have attracted significant attention in the decade since the global financial crisis. The rising popularity of low volatility factor strategies is leading to a situation where investors are ending up taking higher exposure in the same securities.
This is the second paper in our series of Smart Beta and the evolution of factor-based investing and focuses on low volatility factors. In this paper, we introduce ‘Volatility of Volatility’ (VoV) factor - VoV is simply the standard deviation of the volatility of a security. The paper examines the performance of VoV factor in comparison with the low volatility factor and a custom benchmark. We believe that the overall performance of Smart Beta portfolios can be improved by rebalancing the allocations between low volatility factor strategies and VoV factor strategies with the changing market cycles.