Equity markets can suffer uncomfortable drawdowns when stock prices deviate from fair value. Research has shown that stocks with lower volatility tend to outperform stocks with higher volatility, but solely focusing on reducing volatility can inadvertently result in a portfolio with overpriced holdings and concentrated bets.
Emphasizes debt-service capacity
Fundamental measures are used to sever the link between outstanding debt and portfolio weight. This approach avoids overexposure to companies or countries with high debt burdens, resulting in higher credit quality and improved risk-adjusted returns.
Avoids overpriced low-volatility stocks
Investing in low-volatility stocks trading at high valuation multiples erodes the return benefit of low-volatility strategies. The FTSE RAFI Low Volatility Index employs a valuation screen to avoid investing in extremely expensive stocks.
Builds on the RAFI Fundamental Index approach
In selecting and weighting low-volatility securities by fundamental measures of company size, the FTSE RAFI Low Volatility Index series retains all the benefits of the Fundamental Index approach: potential for outperformance, ease of implementation, low cost, and broad diversification.