Following a period of relatively calm asset markets from 2013-2019, in which the CBOE Volatility Index (VIX) averaged just below 15, volatility in asset markets has returned¹ and investors have been looking for ways to protect themselves. A unique approach to risk reduction that has gained popularity in recent years is volatility targeting. Volatility targeting is the explicit practice of adjusting the leverage in a portfolio in an effort to keep its volatility close to a desired target. These types of strategies are increasingly popping up in exchange-traded funds as well as being the engine within various structured products, including fixed index annuities.

As with most things in academic finance, the study of portfolio volatility targeting started with equity portfolios. More recently however, investors, including Research Affiliates, have started utilizing this tool in multi-asset portfolios, providing diversification benefits across equities, bonds and commodities while keeping volatility within a manageable range.

In this paper we explain how volatility targeting works, examine applications across both single asset class equity portfolios as well as multi-asset portfolios and highlight the benefits of incorporating volatility targeting strategies in investor portfolios.