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For the three years ended Wednesday, Nov. 20, 2018, the S&P 500's annualized volatility was 12.30 percent and its largest drawdown during that period was 12.70 percent. Narrow the time frame to the fourth quarter of this year (Oct. 1 through Nov. 20) and the volatility picture is much darker. Over that period, the S&P 500's annualized volatility comes out to 21 percent.Not surprisingly, the return of elevated equity market volatility is motivating investors to revisit strategies that aim to reduce that volatility, other wise known as low or minimum volatility strategies. The low volatility factor, one of the “big five” investment factors, is accessible via an array of exchange traded funds (ETFs), including the JPMorgan U.S. Minimum Volatility ETF ( JMIN ).A primary element of low volatility funds is to perform less poorly when stocks decline, not necessarily capture all of the upside of a strong-trending bull market. As the chart below indicates, the JPMorgan U.S. Minimum Volatility ETF ( JMIN ) is living up to the “less bad” objective, performing much less poorly than the S&P 500 for the 90-day period ending Nov. 20 th . 
Factor Intersection
Some critics assert that stocks classified as low volatility are merely quality or value names with a different label. Academics have examined that phenomenon. The 2016 paper " Understanding Defensive Equity” found value stocks and those with strong profitability (quality) tended to be less volatile than the broader market. However, over long holding periods, a portfolio's low-variance factor exposure can and does shift.A deeper examination “shows that the low-variance portfolio's exposure to value and profitability was less consistent over time than portfolios that focused on the individual value and profitability factors,” according to Morningstar. “The takeaway is that investors shouldn't look at defensive stocks as a way to get clean exposure to the value or profitability factors.”
Sector allocations play important roles in factor strategies and underscore the point that the link between low volatility and other factors is not always as intimate as some market observers may assert. For example, the S&P 500 Value Index currently devotes over 35 percent of its combined weight to the financial services and energy sectors, two of this year's more volatile sectors.Related: Keeping it Short With Bonds is Paying OffRelated: Adding Some Spice to a Boring, But Popular Bond TradeFinancials are vexing investors this year by not positively responding to higher interest rates while oil's recent slide has stoked elevated volatility in the energy sector. The JPMorgan U.S. Minimum Volatility ETF( JMIN) allocates just 19.40 percent of its combined weight to those sector.Likewise, JMIN currently underweights the technology sector (4.40 percent weight) relative to broader benchmarks. While technology stocks are often hallmarks of quality strategies, the sector's fourth-quarter slump is a reminder the sector can display above-average volatility. The aforementioned scenarios do not mean low volatility strategies will consistently be underweight certain sectors with value or profitability traits.“Defensive strategies don't explicitly target stocks trading at lower valuations or those that are more profitable relative to the broader market,” said Morningstar. “Their exposure to both will ebb and flow over time as those factors become more or less risky.”