iQ All Cap Smart Beta Model

 

 

CLICK HERE for a complimentary Model Fact-card.

The secret sauce behind high performance is low volatility. Stock portfolios built with low beta stocks tend to outperform high-beta growth stocks. And you sleep at night without having to worry about big swings in the market.

Beta is a measure of a stock’s relative price volatility compared to the general stock market. A stock with a beta of 1.0 has the same price volatility as the S&P 500 index. High-beta stocks have betas above 1.0 and move by a larger percentage than the S&P 500 moves, both during S&P up moves and down moves. The rationale given for recommending the purchase of high-beta stocks is that the only way to get a higher return is to take higher risks (i.e., higher volatility). 

However (based on a 40-year Harvard study of stock returns between 1968 and 2008), we've learned that low-volatility and low-beta portfolios offered an enviable combination of high average returns and small drawdowns. This outcome runs counter to the fundamental principle that risk is compensated with higher expected return.  Investing in low-beta stocks may be the “the best of both worlds” because you get both a higher return and lower volatility.

The All-Cap Smart Beta Model represents an equal-weighted portfolio of Small, Mid, and Large cap stocks with low 5-year beta and volatility.

Process:

  1. Start with the largest 1500 domestically-traded companies

  2. Sort by 5-year Beta and keep the lowest 10% (150 companies)

  3. Sort by 12-Month Share Buyback and Operating Earnings Yield and keep the top 30 companies

  4. Sort by 5-Year Seasonal Relative Strength divided by 5-Year Standard Deviation and select the top 10 companies

  5. Re-balance Quarterly