RAFI Low Volatility

FTSE RAFI Low Volatility seeks to efficiently reduce equity risk, while maintaining attractive valuations and broadly diversified market exposures.

AT A GLANCE

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Emphasizes debt-service capacity

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Capitalizes on observable inefficiencies

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Focuses on implementation

FTSE RAFI Low Volatility seeks to efficiently reduce equity risk, while maintaining attractive valuations and broadly diversified market exposures.

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.

Thoughtful design built on the Fundamental Index approach

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.

Related Content

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Optimized minimum variance strategies are a proven approach to low volatility investing. The optimization must be constrained, however, to build investable portfolios. Among other side effects, the constraints result in higher volatility and less diversification. Published in the Financial Analysts Journal.
Option-Writing Strategies in a Low-Volatility Framework
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Covered call buy–write strategies have risk–return profiles that are similar to those of low volatility equity portfolios, and both approaches appear to extract return premium from investors with leverage constraints and a preference for lottery-like bets.

A Study of Low-Volatility Portfolio Construction Methods
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In this study, the authors examine the hypothetical performance of various low volatility strategies in historical U.S., global developed, and emerging markets.

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Selecting a low volatility strategy? Constraints improve investability, but they have side effects with unequal consequences for optimized versus heuristically constructed portfolios. The differences may influence your decision.