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Putting minimum variance to the test in volatile times

Putting minimum variance to the test in volatile times

Highly volatile periods for US equity indexes provide an opportunity to examine how alternatively weighted indexes performed in comparison to comparable cap weighted indexes. For instance, did the FTSE USA Minimum Variance Index deliver reduced index variance during a volatile period compared with the FTSE USA Index?

The first two months of 2016 saw volatility return to US equity markets with a vengeance, setting the stage for such a case study. Volatile oil prices, questions around China’s economic viability and divergent monetary policies among central banks all contributed to the large market swings.

In January, equity markets saw a steep decline in the first two weeks of the year as oil prices fell further and China’s economy entered bear market territory. During this time the FTSE USA Index’s value fell by 9.2%. However, by the end of the month the index had recovered by 4% aided by a small rebound in oil prices and foreign central banks hinting at additional stimulus.

February then saw oil prices fall to their lowest level in 13 years dragging US equities down with them. The FTSE USA Index had another sharp fall of 5.5% for a total year-to-date decline of 10.7% by mid-month before turning around again -- closing out February down only 5.4% year-to-date.

YTD 2016 Total Return

As shown above, the FTSE USA Minimum Variance Index – which celebrates its 5th anniversary  this year - followed a similar path of peaks and troughs during the first two months of the year. However, because these swings were less extreme than those of the FTSE USA Index, the FTSE USA Minimum Variance Index delivered lower index variance for the period.  

The year-to-date performance differential between the two indexes was almost 5% through February as the FTSE USA Index was down 5.4%, compared with a decline of only 0.4% for the FTSE USA Minimum Variance Index.

As illustrated in the chart below the FTSE USA Minimum Variance Index has exhibited a smaller standard deviation over the last 12 months than its market cap weighted counterpart.

One-Year Risk and Return

These figures underscore the impact of index construction on the index’s performance, and further demonstrate the FTSE USA Minimum Variance is performing consistently with its objectives.  See our website for more detail on methodology for the FTSE Global Minimum Variance Index Series.


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