Low volatility investing seeks to capitalize on a fundamental mispricing of risk in equity markets. It involves choosing and including a diversified selection of stocks based on the risk level that the stock contributes to the portfolio as a whole; based on the empirical evidence that the least volatile group of stocks would produce equal to or better returns than the broad market over longer periods, most of the time1.

In other words, riskier stocks (think growth stocks) tend not to deliver higher returns than less risky stocks (utilities, consumer staples for instance) over many years. This is commonly referred to as the 'low volatility anomaly' as it runs counterintuitive to the traditional thinking about risk and return and is what low volatility investing is all about.

Higher volatility equities have not generated higher returns than less volatile equities over the long run. By delivering returns competitive with equity markets, low volatility investing allows investors to increase their exposure to equities and reduce the drag of bonds in their portfolios, yielding a similar risk profile to a traditional balanced portfolio of stocks and bonds yet with a greater return potential.

The reality is that risk has not been rewarded over full market cycles. In fact, in falling markets, less volatile equities tend to outperform their more volatile counterparts. Plus, is it ever really a bad time to reduce portfolio risk? In short, low volatility investing can help lead to less 'investment statement shock', while helping you stay the course by staying invested.

Investors may expect equity market returns with less risk. Historically, these strategies have produced better risk-adjusted returns-over a full cycle of course, as there will be periods of underperformance and outperformance. Low volatility investing can dampen both the highs and the lows of returns, which means less severe ups and downs relative to the broad market. Within portfolios, this tends to mean overweight positions in utilities, communication services, consumer staples, health care, utilities and underweight positions in technology, consumer discretionary and energy.

Investors can use TD Low Volatility ETFs to help dampen overall portfolio volatility across geographical locations. TD Q Canadian Low Volatility ETF (TCLV) for Canadian equity exposure, TD Q U.S. Low Volatility ETF (TULV) for U.S. equity exposure and TD Q International Low Volatility ETF (TILV) for international equity exposure.

Let's be clear, low volatility ETFs don't eliminate investment risk altogether or prevent losses during a market downturn, but they can help protect against drawdowns. Volatility can erode returns. Remember, a loss of 50% means that one needs a 100% return to get back to even. Less downside helps one recoup losses more quickly. So, don't overlook low volatility investing, especially when it can help you rest easy at night.

¹Bodjov, Yuriy and Lempriere, Isaac (2015), A Review of the Historical Return-Volatility Relationship, TD Asset Management Inc. The information contained herein has been provided by TD Asset Management Inc. and is for information purposes only.信息出自我们认为可靠的来源。本信息并未提供财务、法律、税务或投资建议。具体的投资、税款或交易策略应根据每位投资者的目标和风险承受能力加以评估。

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