A maximum drawdown may be quoted in dollars or as a percentage of the peak value. When comparing securities, understand the underlying prices as dollar maximum drawdowns may not be a fair comparable base. Bollinger Bands are often used as an indicator of the range a security trades between, with the upper band limit indicating a potentially high price to sell at, and the lower band limit indicating a potential low price to buy at. The Health Care Select Sector SPDR® Fund (XLV) is a well-established ETF that has been trading since 1998. The Health Care Select Sector Index is a representation of the healthcare sector of the S&P 500. XLV’s basket of equities contains companies in healthcare equipment and supplies, providers and services, biotech, life science and industries engaged in healthcare technology.
Citigroup analyst Wendy Nicholson initiated coverage of K shares with a Buy rating in August. She sees the company as a better value than some consumer staple competitors and expects Kellogg’s margins to rise as its emerging-market operations become more profitable. Kellogg enjoyed a stellar June quarter that saw EPS rise 21%, which the company attributed in part to pandemic-related food stockpiling. Kellogg now boasts double-digit annual EPS growth over the past five years – the result of careful management and finetuning of its brand portfolio.
- It aims to provide investors with a smoother ride within equity allocations by creating a portfolio that exhibits less swings — up or down — than the market.
- Factors, such as minimum volatility, have historically provided enhanced returns and/or reduced risk.
- For those looking to hedge portfolios or bet on a fall, one thing will always remain true.
- These picks are components of the S&P MidCap 400 Index – that is, the next 400 stocks in line when you get past the larger S&P 500 Index of blue chip stocks.
But note that put options will also become more pricey when volatility is higher. If prices are randomly sampled from a normal distribution, then about 68% of all data values will fall within one standard deviation. Ninety-five percent of data values will fall within two standard deviations (2 x 2.87 in our example), and 99.7% of all values will fall within three standard deviations (3 x 2.87). One way to measure an asset’s variation is to quantify the daily returns (percent move on a daily basis) of the asset.
Implied volatility can be calculated from the prices of put and call options. Up to this point, we have learned how to examine figures measuring risk posed by volatility, but how do we measure the extra return rewarded to you for taking on the risk posed by factors other than market volatility? Enter alpha, which measures how much if any of this extra risk helped the fund outperform its corresponding benchmark.
Historical Volatility
If an investor expects the market to be bearish in the near future, the funds with betas less than one are a good choice because they would be expected to decline less in value than the index. For example, if a fund had a beta of 0.5, and the S&P 500 declined by 6%, the fund would be expected to decline only 3%. When considering a fund’s volatility, an investor may find it difficult to decide which fund will provide the optimal risk-reward combination. Many websites provide various volatility measures for mutual funds free of charge; however, it can be hard to know not only what the figures mean but also how to analyze them.
Low Volatility Everywhere
On the other hand, an R-squared value close to 0 indicates the beta is not particularly useful because the fund is being compared against an inappropriate benchmark. As proof of its low-volatility credentials, this fund was relatively flat in calendar https://traderoom.info/ 2022, while the broader S&P 500 lost nearly 20%. That shows how utilities can hang tough even when the rest of Wall Street is in trouble. Dividend yields represent the trailing 12-month yield, which is a standard measure for equity funds.
At that time, stocks from those same two sectors represented just 17% of USMV’s portfolio. SPLV’s exposures in these sectors explained just over half of its relative underperformance versus USMV from the mid-February peak to the late-March trough. Volatility is a key variable in options pricing models, estimating the extent to which the return of the underlying asset will fluctuate between now and the option’s expiration. Volatility, as expressed as a percentage coefficient within option-pricing formulas, arises from daily trading activities. When there is a rise in historical volatility, a security’s price will also move more than normal.
Historically, minimum volatility indexes have exhibited less volatility than their broad market counterparts. Many day traders like high-volatility stocks since there are more opportunities for large swings to enter and exit over relatively short periods of time. Long-term buy-and-hold investors, however, often prefer low volatility where there are incremental, steady gains over time. In general, when volatility is rising in the stock market, it can signal increased fear of a downturn.
Since unforeseen market factors can influence the volatility, a fund with a standard deviation close or equal to zero this year may behave differently the following year. One examination of the relationship between portfolio returns and risk is the efficient frontier, a curve that is a part of modern portfolio theory. The curve forms from a graph plotting return and risk indicated by volatility, which is represented by the standard deviation. According to the modern portfolio theory, funds lying on the curve are yielding the maximum return possible, given the amount of volatility. Historically, utility stocks are among those with the lowest volatility compared with other fast-moving sectors like technology.
Low Volatility Slot Machines: Smaller Hits, More Often
A measure of “1” means the stock price moves almost perfectly in line with the S&P 500. Finally, penny stocks and cryptocurrencies have proven to be highly volatile with huge swings in prices. High growth is possible but hard to predict for an individual stock or token. Investors must have the internal fortitude and long-term conviction to hold these assets during periods of high volatility. For the entire stock market, the Chicago Board Options Exchange (CBOE) Volatility Index, known as the VIX, is a measure of the expected volatility over the next 30 days.
It has to do with the compounding value of an investment and how big changes in annual returns can have an abnormal impact on money. “Mid caps tend to exhibit the staying power of larger businesses but may still have substantial growth opportunities ahead.” Another more tactical way to play low-volatility ETFs is to focus on the next tier of the market down from your usual blue chip stocks. That’s where the Invesco S&P MidCap Low Volatility ETF (XMLV, $52.35) comes in.
Make sure you can determine whether implied volatility is high or low and whether it is rising or falling. Remember, as implied volatility increases, option premiums become more expensive. As implied volatility reaches extreme highs or lows, it is likely to revert to its mean. You’ve probably heard that you should buy undervalued options and sell overvalued options.
Low-Volatility Stocks to Stabilize Your Portfolio
J&J expects 2020 EPS to fall between $7.75 and $7.95 – sure, that’s down from a $9 per share forecast at the start of 2020, but it’s well ahead of current analyst estimates. The upcoming presidential election is a massive point of uncertainty, but it’s hardly the only one. The potential for a “second wave” of COVID-19, the state of the U.S. economy, and Chinese relations are all making themselves heard, as well. Most of these factors could continue to haunt U.S. stocks through the end of 2020 – even the presidential election, if the results are contested.
Standard deviation measures how widely prices of a stock are dispersed from its average price. So, the higher the standard deviation of any security, the higher its volatility. Whether volatility is a good or bad thing depends on what kind of trader you are and what your risk appetite is. For long-term investors, volatility can spell trouble, but for day traders and options traders, volatility often equals trading opportunities. Unlike historical volatility, implied volatility comes from the price of an option itself and represents volatility expectations for the future.
On the other hand, a beta of less than one implies a stock that is less reactive to overall market moves. And, finally, a negative beta (which is quite rare) tells investors that a stock tends to move in the opposite direction from the S&P 500. A fund with a consistent four-year return of 3%, for example, would have a mean, or average, of 3%. The standard deviation for this fundamentals of web application development fund would then be zero because the fund’s return in any given year does not differ from its four-year mean of 3%. On the other hand, a fund that in each of the last four years returned -5%, 17%, 2%, and 30% would have a mean return of 11%. This fund would also exhibit a high standard deviation because each year, the return of the fund differs from the mean return.