It may be naive to presume one can completely decouple from market swings, but perhaps what got me thinking about this was in 2020 when a lot of low vol ETFs were getting negative coverage from financial media. If we look at Vanguard's low vol ETF for instance, performance after 2020 wasn't terrible; the product contract lays out a longer-term view after all. Three years isn't that long term but that's all Morningstar had

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I'm trying to be objective as I can, but seems like 6% is a bit low when assuming double-digit sigma volatility. Some have cheekily re-labeled these strategies as "minimum return" strategies.

I'm aware there is a cherry-picking element to this article but the underperformance has persisted for the better part of two years now, as I write the post. Relevant excerpt:

Between February 26 — when the first U.S. case of Covid-19 was announced — and March 31, 2020, some of the largest low vol strategies defied investor expectations, including the Invesco S&P 500 Low Volatility ETF and iShares Edge MSCI Minimum Volatility USA ETF, according to PanAgora. The S&P 500 lost 17.22 percent during the period, while the Invesco ETF and iShares fund lost significantly more than that. The Invesco and iShares funds lost 20.29 percent and 18.35 percent, respectively.


We all know what low-vol strategies are supposed to do, but with growing empirical evidence showing that they are not (see: returning less while exhibiting comparable volatility) then what are they being used for now or are most investors shunning such strategies?
  • 1
    Risk and reward are correlated - the higher the risk, the higher the reward (on average). So why do you think showing significantly lower risk and slightly lower reward is "bad coverage"?
    – D Stanley
    Aug 31, 2022 at 13:22
  • Don't take my word for it: institutionalinvestor.com/article/b1mdf9wmfdwhsr/…. Also quickly looking at SPY ETF, it's got very comparable risk if measured in std dev. Actually, I'm not trying to hate on low volatility strategies, I'm just wondering what kind of role they tend to fill in a portfolio or are they 'truly' shunned. Sep 1, 2022 at 6:54

1 Answer 1


There are several reasons why an investor might want lower volatility, even if it meant sacrificing some return. Investors that are looking to draw from their retirement funds may want lower risk to avoid compounding a bad year with withdrawals, since losses require a larger gain just to get back to zero (e.g. a 10% drop requires an 11% gain to offset it).

Other institutional investors like pension funds may want lower volatility to ensure a narrower range of returns - a large return is nice, but the risk of a large drop when they have obligated withdrawals can be devastating.

Not everyone is trying to maximize return at all cost. Most investors will try to make efficient use of risk, trying to maximize return given a comfortable risk level. One measure of this efficiency is the Sharpe Ratio, which is the ration of excess return (return above a "risk-free" rate) to the volatility of the portfolio. The higher the Sharpe Ratio, the more return you get on average for each unit of risk.

  • Right. I wasn't disputing risk-on turns morphs into wealth preservation over time for those types of investors. But I think what the critics are saying is that what we are seeing empirically is not that kind of situation: low vol strategies are just returning less while losing just as much. You mention the Sharpe ratio; I'm dubious if low-vol is even on the efficient frontier. Perhaps a better way to phrase my question would be: we all know what low-vol is supposed to do, but given that it's not, what is it being used for? Sep 2, 2022 at 2:13
  • Perhaps it's hubris to anticipate black-swans like 2020 or armed conflict, but the point stands that low-vol is not a very palatable risk-reward solution for rational investors, and we have little to suggest that will change any time soon. Sep 2, 2022 at 2:17

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