With stocks in 2017 on track to experience the fewest jitters in 22 years, do the stocks you buy or the industries they represent matter more to performance of a portfolio of so-called low volatility stocks?
In the energy and technology industries, the selection of stocks explained performance more than the ups and downs of the sector generally, at least for the year that ended on Oct. 31, according to a recent analysis by Fei Mei Chan, director of index investment strategy for S&P Dow Jones Indices.
Among the 11 sectors represented in the S&P Low Volatility Index, energy stocks experienced the largest fall in volatility over the year, Chan notes. Yet the weighting of energy stocks in the index has remained the same – about 2% in the latest rebalancing of the index – suggesting stock selection mattered more to the falloff than volatility of energy stocks generally.
Similarly, tech industry stocks experienced greater volatility during the year that ended Oct. 31. Yet the weighting of tech stocks in the index remained unchanged, at 11%.
“This would suggest that there was a wide range of volatility within both sectors, and that stock selection was more meaningful than the sectoral effect,” Chan writes.
Unlike energy and tech, the weights of each of the nine other sectors in the index changed over the relevant period. Thus, volatility in the sectors themselves provided a gauge into the performance of the index.
“As a rule of thumb, sector level volatility usually provides good insight into the S&P 500 Low Volatility Index, even though the index’s methodology is entirely focused at the stock level,” notes Chan. “For the latest rebalance, however, sectoral volatility was only part of the picture.”