Insights   •   Volatility

Lower Drawdowns can Deliver Cumulative Value in a Market Trending Higher

29 October 2019

Key Points:

  • Despite the challenging trade environment, equity prices remain near their highest levels in a decade in both the US and Europe.
  • Volatility has remained relatively low, despite intermittent spikes, leading to increasing investor concerns around equity price sensitivity to geopolitical events.
  • Heightened uncertainty and equity price sensitivity could justify a low volatility approach for investors looking to remain long US and European equities but seek protection from drawdowns.

A low volatility approach allows investors to seek calmer waters. Over the long run, the low volatility investment approach has resulted in higher relative performance compared to the benchmark. Investors can look no further than the recent market moves to see the value that defensive positioning can offer in their portfolios.

In the past 12 months, US and European equity markets have experienced three significant market pullbacks: December 2018, May 2019 and August 2019. During each of these pullbacks, both US and European low volatility strategies displayed lower drawdowns, which ultimately translated to a cumulative outperformance for each strategy over the entire 12 months (Figure 1), despite both benchmark markets trading positively.

The performance of low volatility strategies in the past 12 months is a clear demonstration of how (low) volatility factor investing can be a helpful tool to those seeking better risk-adjusted returns. The magnitude of excess performance in down months is greater than the performance draw in up months historically. The strategies can potentially outperform their market cap benchmark, from which they select stocks, even over a period of net positive performance.

SPDR offers a suite of low volatility ETFs that follow a simple yet effective methodology. In one trade, investors can introduce a defensive posture to their eurozone and US equity allocations using the SPDR EURO STOXX Low Volatility UCITS ETF and SPDR S&P 500 Low Volatility UCITS ETF.

Figure 1: YTD Cumulative Returns of S&P UK High Yield Dividend Aristocrats vs. S&P UK BMI

GBPSource: Morningstar Direct, as of 31 October 2019. Index performance is based on net total return in base currency. Past performance is no guarantee of future results. It is not possible to invest directly in an index. Index performance does not reflect charges and expenses associated with the fund or brokerage commissions associated with buying and selling a fund. Index performance is not meant to represent that of any particular fund.


European-Domiciled ETP Segment Flows (Top/Bottom 5, $mn)

European-Domiciled ETP Asset Category Flows ($mn)

Sources: Bloomberg Finance L.P., for the period 17–24 October 2019. This information should not be considered a recommendation to invest in a particular sector or to buy or sell any security shown. It is not known whether the sectors or securities shown will be profitable in the future. 

Fund Details

Source: State Street Global Advisors, Bloomberg Finance L.P., as of 30 September 2019.

Standard Performance

Source: State Street Global Advisors, as at 30 September 2019. Performance quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted. All results are historical and assume the reinvestment of dividends and capital gains. Visit for most recent month-end performance. The calculation method for value added returns may show rounding differences. Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Some of the products are not available to investors in certain jurisdictions. Please contact your relationship manager in regards to availability.

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