What strategies are suitable for risk-averse investors?

Text transcript

Welcome to Advisor to Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject-matter experts themselves. 

* * * 

Greg Zdzienicki, vice president, client portfolio manager, equities, CIBC Asset Management 

* * * 

The low-volatility effect is a term that’s used to describe the observation that stocks with lower price volatility historically have generated higher returns than stocks with higher price volatility. 

And this was first researched by academics decades ago as an anomaly of conventional asset pricing theory. It observed that stocks that have lower price volatility historically have generated higher returns than those with higher price volatility. And investing approaches that sought to exploit this low-volatility effect started to gain a lot of prominence, particularly after the 2008 global financial crisis, as investors sought a less volatile investment experience. 

Low-volatility strategies offer a defensive investment approach, and they can lower a portfolio’s sensitivity to movements in the overall stock market, also known as beta, thereby reducing their overall volatility and enhancing risk-adjusted returns over the long term. 

* * * 

Low-volatility strategies are protected during significant market dislocations. You know, if we go back over the years and take a look back to the tech bubble, where we had a valuation issue, multiples got expensive, MSCI World Index was down about 20%, the S&P Global Low Vol Index was actually up about 3% during that period of time, really protecting on the downside. 

If we fast forward to the financial crisis in 2007 to 2009, and this was an issue that was caused by a debt crisis, we had the MSCI World Index down about 32%. Low-vol strategies down just less than half of that during that same period of time. And if we move forward to 2022 when we saw volatility come back, the MSCI World Index [was] down about 13%, with the S&P Global Low-Vol Index down only 1%. 

So during these market dislocations, whether it was a valuation response by the markets, whether it was a response to a debt crisis, or whether it was a response to a pullback in volatility, like we saw in 2022, low-volatility strategies have protected on the downside and offered investors diversification while maintaining long-term equity market exposure. 

* * * 

So far throughout 2025, we’ve had a number of different investment environments. We started off the year with a lot of volatility. In January, when tariffs were announced, the market did see a tremendous amount of volatility. The performance of low-volatility strategies during the tariff troubles that we saw in the beginning of 2025 was exactly what we’d have expected it to be. 

In Canada, low-volatility strategies were down about 2% to 4%, whereas the index was down about 12%, 12.5% during that same period. In the U.S., we saw a very similar type performance: S&P 500 down 18%, 19% during that period of time, whereas low-volatility strategies were down closer to 6%. And in international markets, we saw the same phenomena as well. When we look at international markets down about 13% during the tariff trouble period, the low-volatility strategy is down closer to 5%. Across all regions, whether international, U.S. or Canadian, we saw low-volatility strategies perform exactly as expected, protecting investors on the downside. 

* * * 

At CIBC, we combine our low-volatility strategies with dividends. And by combining dividends with low volatility improves the sustainability and visibility of a portfolio’s cash flow stream. So the largest impact to these low-volatility strategies, of course, is going to be volatility. As the VIX moves up or the volatility index starts to move up, these strategies tend to show their defensive characteristics. These strategies that are coupled with dividend-paying stocks also tend to resemble characteristics of quality, high cash flow and good profitability. 

* * * 

Low-volatility strategies play a very important role for long-term strategic asset allocation. 

First of all, they have a smoother return profile. So allocating the low-volatility equities can lead to a more stable return profile, aiding investors in achieving those long-term goals, while protecting capital during market downturns. They also have enhanced diversification. This tends to improve diversification when integrated into various investment styles, be it growth, value or core. 

When added to a portfolio, low-volatility strategies improve capital preservation and recovery times. They have the potential to provide better capital preservation, and they facilitate faster recovery in uncertain market conditions, making them an attractive option for risk-averse investors. And low-volatility strategies have historically outperformed during market corrections, providing better risk-adjusted returns, lower downside capture, which makes them a valuable complement to traditional portfolio strategies. 

* * * 

By using low-volatility strategies for risk reduction, clients are still maintaining long-term equity exposure. Whereas an allocation to fixed income can provide risk reduction in a portfolio and smoothen out a return profile, it does not provide that long-term equity exposure that some investors need in their portfolio to achieve those long-term goals. 

Low-volatility strategies, by their nature, tend to invest in more defensive industries. When we look at the sector exposures and say, at a Canadian low-volatility dividend ETF, there’s going to be significant exposure to areas like financials, utilities, consumer staples, communication services. These are areas of the market that tend to exhibit these lower-volatility characteristics. These are also areas of the market that tend to have better cash flows, higher profitability and tend to pay dividends. Areas of the market, for example, information technology, consumer discretionary, materials in Canada will be underrepresented within a low-volatility ETF. 

If we take a look at the U.S., we do see a significant difference between the exposure to the broad market and a low-volatility dividend ETF. And that is what really drives that diversification benefit. Low-volatility ETFs in the U.S. will be overweight consumer staples, overweight financials, overweight utilities, and will have a meaningful underweight to areas such as consumer discretionary [and] information technology. 

So particularly in the U.S., where we’ve seen a lot of leadership from the Magnificent Seven or the Great Eight — we saw technology lead and becoming substantial part of the index — low-volatility ETFs in the U.S. are going to look very different than the benchmark, again, continuing to deliver those diversification benefits and protection during downturns in the market. 

Internationally, we will see very similar type exposures, and again, we will have less exposure to areas like technology, materials and consumer discretionary.  

When we look at low-volatility ETFs, and we take a look at the market cap that they invest in, if it’s Canada or an international ETF, the majority seems to be clustered in that $10 to $50 billion market-cap range. In the U.S., we’re probably more in the $50 to $100 billion, with significant exposure as well in companies over $100 billion.

**

This program is intended for Advisor Use Only. The views expressed in this material are the views of CIBC Asset Management Inc., as of the date of publication unless otherwise indicated, and are subject to change at any time. CIBC Asset Management Inc. does not undertake any obligation or responsibility to update such opinions. This material is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice, it should not be relied upon in that regard or be considered predictive of any future market performance, nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this material should consult with their advisor. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, or other similar wording. In addition, any statements that may be made concerning future performance, strategies, or prospects and possible future actions taken by the fund, are also forward-looking statements. Forward-looking statements are not guarantees of future performance. These statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results and achievements of the fund to differ materially from those expressed or implied by such statements. Such factors include, but are not limited to: general economic, market, and business conditions; fluctuations in securities prices, interest rates, and foreign currency exchange rates; changes in government regulations; and catastrophic events. The above list of important factors that may affect future results is not exhaustive. Before making any investment decisions, we encourage you to consider these and other factors carefully. CIBC Asset Management Inc. does not undertake, and specifically disclaims, any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise prior to the release of the next management report of fund performance. Past performance may not be repeated and is not indicative of future results. The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management Inc. ^® The CIBC logo and “CIBC Asset Management” are registered trademarks of CIBC, used under license.