By Kim Pike
The CBOE last month announced the November 30th launch of the CBOE Low Volatility Index (LOVOL) – the exchange's response to risk-averse investors who are seeking smoother returns. There are some key differences among LOVOL and other so-called low volatility indexes.
For one, the LOVOL index is a 40% / 60% composite of an S&P 500 (SPY) covered-call option-and-stock strategy plus another of the “tail hedge” variety. The CBOE Holdings’ (CBOE) Chicago Board Options Exchange press release states:
"The CBOE LOVOL Index measures the performance of a portfolio that overlays SPX and CBOE Volatility Index (VIX) calls over the S&P 500 Index. Specifically, the index is obtained by holding a portfolio of S&P 500 stocks and simultaneously selling SPX calls and buying one-month VIX 30-delta calls on a monthly basis."
Are there investors out there who want this much complexity in a new low vol index?
“Many investors now are much more risk-averse than investors were in the late 1990s,” replied Matt Moran, VP Business Development at CBOE. “Two painful bear markets in stocks since 1999 have impacted investors' risk-aversion.”
Risk aversion isn't the only prompt for interest in low volatility indexes. Much has been made recently of the low volatility anomaly - the fact that many portfolios of low volatility stocks often have produced higher risk-adjusted returns than portfolios with high volatility stocks in many markets. As more studies reveal the intricacies of this anomaly, a greater number of investors have sought out lower risk through indexes such as LOVOL.
In a graph shown here from the CBOE community blog, you can see since the LOVOL’s base month of March 2006, the LOVOL has risen 38%, the S&P 500 is up 26%, and the MSCI EAFE is up 3%.
You can read more about LOVOL Index at www.cboe.com/LOVOL.
What are your thoughts on the low volatility anomaly? Have you recently sought out more risk-averse investment strategies? Leave us a comment. We love hearing from you.