S&P Dow Jones Indices (S&P DJI) publishes a series of low volatility indices, offering market participants a perspective on the returns of lower volatility equities and forming the basis for index-linked products globally.1 Low volatility indices have typically outperformed their underlying broad market benchmarks on both an absolute and a risk-adjusted basis.2 S&P DJI recently extended the returns history for one of the widely followed low volatility benchmarks—the S&P 500 Low Volatility Index—back to February 1972.3 Using the additional two decades of return information, this paper:
• Offers a longer-term perspective on the ability of low volatility indices to combine downside protection and upside participation;
• Assesses the relative importance of equity market movements and interest rates in explaining the low volatility index’s performance; and
• Demonstrates the potential applications of low volatility indices.
Exhibit 1 shows the risk-adjusted returns for the S&P 500 Low Volatility Index and the S&P 500 in each decade since 1972.
1 Please see Appendix A for an overview of the low volatility indices offered by S&P Dow Jones Indices. 2 Chan, Fei Mei and Craig J. Lazzara, “Is the Low Volatility Anomaly Universal?,” S&P Dow Jones Indices, April 2019. 3 Previously, the returns data began in November 1990.