U.S. Low and Minimum Volatility Indexes: An EmpiricalAnalysis of Factor Exposure

Abstract

This study investigates the major low and minimum volatility indexes used as benchmarks for the largest ETFs in the space. The authors contend that the findings on low and minimum volatility investing in the academic literature are captured by the indexes. Specifically, they find that the indexes examined provide superior risk-adjusted performance relative to a market capitalization benchmark. They also find that factor exposures are significant, on average, and explain away the significant alphas in the large-/mid-cap but not small-cap indexes examined. Further, they find that factor exposures, particularly value and momentum, are time-varying and can be of either sign, whereas investment and profitability exposure are generally positive and consistent. Smart-beta and factor investors should be aware of the nature of the factor exposures that low and minimum volatility strategies contribute to a portfolio.