- Two trading models are compared which select periodically 8 large-cap minimum volatility stocks from the Health Care, Consumer Staples, and Utilities sectors of the S&P 500.
- The models only differ from each other with regard to hedging, and sell rules which extend stock holding periods for one model to longer than one year.
- Backtests over a 15.5 year period show similar average annualized returns of about 36% for both models, but the number of realized trades differ, 148 versus 618.
- The analysis shows that in this case, and perhaps in general, frequently trading minimum volatility stocks does not necessarily produce better returns than for one year minimum holding periods.
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Minimum Volatility Stocks: Does Frequent Trading Result in Better Returns?
Best8(S&P500 Min-Volatility)-Tax Efficient Large-Cap Portfolio Management System With Minimum Volatility Stocks of the S&P 500
- This model invests periodically in eight highly liquid large-cap stocks selected from those considered to be minimum volatility stocks of S&P 500 Index.
- Most stock positions are held for longer than one year resulting in a Tax Efficiency ratio of 81.4%.
- When adverse stock market conditions exist the model shorts the 3x leveraged Ultrapro S&P500 ETF (UPRO) – hedge/current holding ratio= 45%.
- It produced a simulated average annual return of about 36% from Jan-2000 to end of June-2015.
Best8(S&P500 Min-Volatility) Large-Cap Portfolio Management System With S&P 500 Minimum Volatility Stocks
This model trades in highly liquid large-cap stocks selected from those considered to be minimum volatility stocks of the S&P 500 Index. It produced a simulated survivorship bias free average annual return of about 36% from Jan-2000 to end of Dec-2014.
Minimum volatility stocks should provide exposure to the stock market with potentially less risk, seeking to benefit from what is known as the low-volatility anomaly. Consequently, they should show reduced losses during declining markets, but should also show lower gains during rising markets. However, our backtests show that better returns than the broader market can be obtained under all market conditions by selecting 8 of the highest ranked stocks of a universe made up from minimum volatility stocks of the S&P 500.
With reference to Section 202(a)(11)(D) of the Investment Advisers Act:
We are Engineers and not Investment Advisers,
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