Does 'Up' Volatility Count?

By Tom Bradley

In reading Rob Carrick’s 2015 ETF Buyer’s Guide in the Report on Business on the weekend, I couldn’t help but notice how many ‘Low Volatility’ funds were featured and how well they did in 2014. The best one, the BMO Low Volatility Canadian Equity ETF, was up 28.4% last year and has some of the hottest stocks in Canada in its top 10 holdings (Fairfax, Alimentation Couche-Tard, Dollarama, Empire Company, Metro, BCE and Constellation Software).

The BMO ETF “utilizes a rules based methodology to select the least market sensitive stocks based on five year beta [a statistic that measures sensitivity, or how much of the stock’s movement is accounted for by changes in the overall market]. The 40 lowest beta stocks from the 100 largest and most liquid securities in Canada are selected.”

It may be my warped mind, but this awesome performance prompts a question – Has this BMO ETF fulfilled its ‘low vol’ mandate? Or more to the point – is ‘up’ volatility good in a ‘low vol’ fund?

Certainly no unitholders are complaining, but they should think about whether a fund that was up 28% in a year is really a low volatility fund.