Growing concerns that supposedly high levels of investment in low volatility strategies will lead to a major market incident are overblown, according to Robeco’s head of quantitative equity research.
Focusing on similar concerns among factor-focused funds, David Blitz said there has been much talk over exposure to passive products promising low volatility, but the actual exposure is not being discussed in detail.
In an academic paper entitled ‘Are ETFs harvesting factor premiums?’, Blitz argued against the idea that factor premiums are being eroded by ETF investors.
‘At first sight, investors looking only at the billions of dollars invested in ETFs specifically targeting the low-volatility anomaly may rightfully be concerned about possible overcrowding. However, a closer look shows the funds in question only represent a small fraction of the total ETF market.’
‘Moreover, when looking at the other end of the spectrum, it turns out that there are a similar number of ETFs which provide exactly the opposite factor exposure, with a significant bias towards high-volatility stocks.’
Blitz said these tend to be sector-focused funds and, while not labelled ‘high-volatility funds’, they neutralise the exposure of the low-volatility ETFs that are raising concerns.
Returning to focus on factor-based investing, Blitz said that individual ETFs may specifically target certain factors that successfully deliver premiums. However, he said that this is not the case at an aggregate level.
‘These findings refute the idea that factor premiums are rapidly being arbitraged away by ETF investors, and also the related concern that factor strategies could be turning into overcrowded trades,’ he added.