Objective research to aid investing decisions

Value Investing Strategy (Strategy Overview)

Allocations for June 2024 (Final)

Momentum Investing Strategy (Strategy Overview)

Allocations for June 2024 (Final)
1st ETF 2nd ETF 3rd ETF

Easy Way to Capture Low-Beta Effect?

| | Posted in: Volatility Effects

Is there a good short-cut for constructing a low-beta portfolio? In their March 2013 paper entitled “Country and Sector Drive Low-Volatility Investing in Global Equity Markets”, Sanne de Boer, Janet Campagna and James Norman investigate the role of country and sector effects in low-volatility investing across global stock markets. They construct country-sector capitalization-weighted sub-indexes (for example, U.S. Utilities) from stocks in the MSCI World Index. They then compare performances of a portfolio of these sub-indexes and a portfolio of individual stocks, both reformed every six months (ends of May and November) to minimize future volatility as predicted by a proprietary model (Axioma’s Global Risk Model). All portfolios are long-only with no leverage. Using monthly returns and market (free-float) capitalizations of MSCI World Index stocks during 1999 through 2012, they find that:

  • The gross return (volatility) of the country-sector low-volatility selection strategy is slightly better (higher) than for the individual stock strategy, such that their gross risk-adjusted outcomes are similar (see the charts below). Both strongly and steadily outperform the capitalization-weighted index.
  • Market-adjusted gross returns for the country-sector and individual stock strategies are highly correlated, with the few intervals of market underperformance associated with strong market rallies.
  • Both the country-sector and individual stock strategies exhibit reasonably high market upside capture (about 50%) and very low market downside capture (20%), arguably because of an anti-bubble aspect of low-volatility investing.
  • The country-sector strategy is more liquid than the individual stock strategy, with lower average annual turnover (94% versus 133%) and less concentrated holdings. Lower turnover indicates lower portfolio reformation costs.

The following charts, taken from the paper, compare annualized gross reward-risk relationships during 1999 through 2012 for: (1) the capitalization-weighted index of all stocks in the sample; (2) a semi-annually reformed portfolio of individual stocks selected to minimize expected volatility (Stock Min Vol); and (3) a semi-annually reformed portfolio of country-sector indexes selected to minimize expected volatility (Country-Sector Min Vol). Calculation of Sharpe ratios employs the 3-month U.S. Treasury bill yield as the risk-free rate.

The country-sector selection strategy generates a slightly better gross return with slightly higher volatility than the stock selection strategy, such that their gross Sharpe ratios are close in value. Results imply that a country-sector selection strategy captures much of the benefit of low-volatility investing in global equities.


In summary, evidence suggests that county-sector asset granularity effectively captures the benefits of low-beta investing in global equities.

Cautions regarding findings include:

  • Return calculations are gross, not net. Including reasonable trading frictions for semi-annual portfolio reformation would reduce reported returns.
  • The country-sector sub-indexes are not tradable assets, thereby ignoring any management/administrative costs associated with creating and maintaining fund proxies. There may be a robust enough set of funds available to support a low-beta country-sector strategy.
  • The authors do not describe how the model used to predict low-volatility assets works, or exactly how they apply it. Nor do they include the costs of using the model (or paying a manager to use it) in return calculations. Simpler, publicly available methods of beta/volatility prediction may work as well as the proprietary model.

For another perspective (cited by this study), see “Layers of Low Beta”.

Daily Email Updates
Filter Research
  • Research Categories (select one or more)