An investment strategy for reducing risk in the long run has raised it in the short run.
Funds holding stocks that fluctuate less than the market as a whole are supposed to do better in bad times while still faring well in good times. Their performance in 2020 has been perverse: Several lost at least as much as the market in February and March, but later lagged far behind when stocks shot up more than 50%.
The low-risk funds put old lessons in high relief: Historical returns often paint a distorted picture, rigid rules have unintended consequences and the market loves to make monkeys out of people who think they’ve solved it.
Investors added $36.5 billion to these exchange-traded funds from 2017 through 2019, according to FactSet, with $22.3 billion pouring in last year. The biggest: the tonguetwister-ish iShares MSCI USA Min Vol Factor ETF, at $34.6 billion in assets, and Invesco S&P 500 Low Volatility ETF, with $8.8 billion.
Yet, over the past year, seven of 19 such funds tracked by FactSet have fluctuated even more sharply in down markets than their benchmarks. Almost all have bounced around at least 85% as much as their market averages.
