Thursday's stock market action reflected the tug of war going on right now between bulls and bears about the likely future course of the global economy. The rebound over the past several months has stemmed from rising optimism about getting past the worst of the COVID-19 pandemic, but with the coronavirus stubbornly sticking around and showing up more prevalently in new areas, many worry that a less favorable outcome is likely. The Dow Jones Industrial Average (^DJI +0.63%), S&P 500 (^GSPC +1.02%), and Nasdaq Composite (^IXIC +1.23%) were relatively quiet today as market participants tried to pick sides.
Today's stock market
|
Index |
Percentage Change |
Point Change |
|---|---|---|
|
Dow |
+1.18% |
+300 |
|
S&P 500 |
+1.10% |
+33 |
|
Nasdaq Composite |
+1.09% |
+108 |
Data source: Yahoo! Finance.
For many investors, the return of stock market volatility in 2020 has been unwelcome, and they've been taken by surprise by the ferocity of the declines and subsequent bounces. However, some investors who anticipated the potential for a bear market are even more upset, because the investments they chose to help them manage their risk level haven't produced the results they expected.
In particular, low-volatility ETFs are designed in the hope that they'll provide some ballast to portfolios by moving less violently than the overall market. Unfortunately, some of the most popular such offerings -- including iShares Edge MSCI Minimum Volatility USA (USMV +0.82%) and Invesco S&P 500 Low Volatility (SPLV 0.04%) -- have underperformed the market, taking investors on nearly as wild a ride as they would've experienced by simply owning an S&P 500 index fund.
What went wrong?
The coronavirus bear market in late February and March was surprising not just because of its speed, but also in which stocks fared the worst. After a 10-year-long bull market that sent high-growth stocks soaring, many investors expected that it would be those high-flying growth leaders that would have the furthest to fall in a downturn.
Instead, many high-priced growth stocks continued to do well even as the rest of the market struggled. Some of the biggest winners were in technology, where many rising stars had their stocks soar on their prospects for helping businesses survive the economic fallout from pandemic-related closures.
Technology stocks tend to be volatile, and so it's harder for them to show up in a low-volatility ETF. Currently, the iShares low-volatility ETF has about 18% of its assets in tech, compared to 23% for the S&P 500. The Invesco ETF weighs in with just a 9% allocation to tech, costing that fund even more in relative performance.
Image source: Getty Images.
On the other hand, some sectors that you'd ordinarily expect to behave more conservatively didn't. For the iShares fund, heightened exposure to financials proved extremely costly, because big banks took it on the chin for several reasons. Yield curves flattened as rates fell, and worries about credit quality caused bank stocks to underperform badly against the S&P 500. For the Invesco ETF, dramatically overweight exposure to industrials stocks proved problematic, with cyclical stocks suffering even more than normal from factory closures and other measures designed to stem the spread of COVID-19.
There's no such thing as a sure thing
Many investors look for ways to protect themselves from downturns, and the low-volatility stock approach has indeed been effective in the past. But as with all things related to investing, there's no guarantee that what worked before will work again. Investors in these funds learned that the hard way, and it's important to look at your portfolio critically to assess real risk against everything that could happen.
