ETF: Do volatility managed ETFs work in volatile times?

In ETF Blog, Latest by Kristia van Heerden

Remember those strange volatility ETFs Absa launched a while ago? They were specifically designed to protect your money during volatile times. If you’ve looked at your investments even briefly in the past two weeks, you don’t need me to tell you that the volatile times have arrived, wearing sequins and singing show tunes.

Hint: You can learn more about these ETFs in this podcast.

This utter madness presents an excellent opportunity to see how these managed volatility ETFs actually perform. Back-tested before listing, every ETF is profitable. It’s when the rubber hits the road that we see which strategy passes muster.

We’ve asked Len Jordaan, one of the masterminds behind this strategy, to tell us how these ETFs have held up over the past few weeks. In the post below, he tells us how these ETFs have performed since the end of February and how they’re likely to behave going forward. If you’d like to read more about the thinking behind these funds, Len provides a detailed explanation in this downloadable PDF.


For several months post their listing, the funds assumed relatively static asset allocations as equity markets experienced a benign period.

The Defensive Fund was split 50/50 between equities and cash, with both the Moderate and High Growth Funds fully invested in equity. However, with news that COVID-19 was likely to have an impact on financial markets, all of the funds soon responded to the heightened equity volatility.

From the end of January 2020, the Defensive Fund started selling its equity holdings and by the end of February was fully allocated to cash.

With its higher Target Volatility, the Moderate Fund was slower to respond, but was very aggressive when it did – from an allocation of 100% equity on 25 February 2020, the portfolio held no equity by 12 March.

The aggressive selling of equities by these portfolios means that investors have not incurred any of the losses experienced by the equity market since 25 February and 12 March respectively.

The High Growth Fund remained fully invested in equities until 12 March, when it too started to sell its equity holdings. It sold its last share on 17 March and is now fully allocated to cash.

It’s important to emphasize that these funds track indices and are passively managed. The manager has no discretion to second-guess the allocation and is mandated to weight the portfolio according to the Target Volatility process on a daily basis.

The impact on the performance of the funds has been significant when compared to the Top40. Due to the fact that the Defensive Fund is highly invested in cash, the Top40 index is not a fair benchmark, however we have plotted the performance of the Moderate and High Growth ETFs over various time periods up to 16 March:

1 Month 3 month 3 Month – 1 1 year 1 Year – 1
Moderate TV (15%) (16%) (1%) (8%) 8.15%
High Growth TV (27.7%) (27%) 0% (14.5%) 18.25%
Top40 (33%) (32%) 4.5% (31%) 4%

 

The columns that reference “ -1”, time periods are for periods that start 3-months or 1 year ago from 16 March, but exclude the latest month. These figures demonstrate that in addition to protecting investors in times of elevated risk, investors participate substantially in equity market returns when equity returns are positive.

Anticipated Behaviour

While equities remain volatile, the funds will continue to invest in cash and earn cash-like returns. The funds will begin to invest in equities when volatility subsides and systemic risk is in decline. They are unlikely to begin purchasing shares when equities ‘bottom-out’, just as they did not sell equities at their peak – Target Volatility is unlikely to catch the inflection points. However, we believe that the risk management that Target Volatility introduces to these portfolios is where the majority of the benefit lies.

We will be monitoring these funds closely in the coming months and report to investors periodically.

For now, we are very satisfied the Absa NewFunds Managed Volatility ETFs have behaved as advertised and have provided investors with an invaluable risk management strategy in these challenging times.

-Len Jordaan

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