One of the hottest trades in the last several months has been to buy a basket of low volatility stocks. The idea is that one can insulate their portfolio from the market’s fluctuations by buying stocks that are less likely to see swings in value. The problem is, the trade has gotten very crowded. Legal & General Investment Management says that “Low volatility might be becoming vulnerable as investors chasing recent performance and buying into gloomy 2018 outlooks flock into it … It is becoming a relatively consensus position, which for us is a warning sign”.
FINSUM: Low volatility stocks held up well in the tumultuous fourth quarter, but the attractiveness of the strategy has made valuations quite high. Such stocks typically lag in upward markets, so there does seem to be some significant risk here.