S&P Dow Jones Indices (S&P DJI) publishes a series of low volatility indices, offering market participants a perspective on the returns of lower volatility equities and forming the basis for index-linked products globally.1 Low volatility indices have typically outperformed their underlying broad market benchmarks on both an absolute and a risk-adjusted basis.2 S&P DJI recently extended the returns history for one of the widely followed low volatility benchmarks—the S&P 500 Low Volatility Index—back to February 1972.3 Using the additional two decades of return information, this paper:
• Offers a longer-term perspective on the ability of low volatility indices to combine downside protection and upside participation;
• Assesses the relative importance of equity market movements and interest rates in explaining the low volatility index’s performance; and
• Demonstrates the potential applications of low volatility indices.
Exhibit 1 shows the risk-adjusted returns for the S&P 500 Low Volatility Index and the S&P 500 in each decade since 1972.Source: S&P Dow Jones Indices LLC. Chart based on daily data between Feb. 18, 1972, and Dec. 31, 2019. Risk-adjusted returns based on the ratio of annualized returns to annualized volatility. Past performance is no guarantee of future results. Chart is provided for illustrative purposes and reflects hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations associated with back-tested performance.
1 Please see Appendix A for an overview of the low volatility indices offered by S&P Dow Jones Indices. 2 Chan, Fei Mei and Craig J. Lazzara, “Is the Low Volatility Anomaly Universal?,” S&P Dow Jones Indices, April 2019. 3 Previously, the returns data began in November 1990.