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Ben Felix - Low Volatility - Low Beta ETFs

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Author: Ben Felix
Categories: Personal Finance
Tags: finance
Views: 2 · Last viewed: 2026-10-16 10:03 UTC

Short Summary

Main recommendation: Ben Felix argues that low volatility ETFs are not a free lunch; their historically higher risk-adjusted returns come from known factor exposures (value, profitability, investment) rather than a true anomaly, so most investors should prefer plain index funds. The low volatility anomaly was explained by the five-factor asset pricing model, which attributes the excess returns of low beta stocks to their exposure to these risk factors.

Key Points

  • Market beta measures a stock's or portfolio's sensitivity to overall market moves; a beta of one moves with the market, and lower-beta assets are less volatile than the market.
  • For roughly 50 years, low beta stocks earned higher returns and higher risk-adjusted returns than high beta stocks, which contradicts the expected risk-return relationship of efficient markets.
  • Under the capital asset pricing model, about two-thirds of return differences between diversified portfolios could be explained by beta, and small cap and value stocks appeared anomalous; the Fama-French three-factor model (adding size and value) explained about 90% of return differences between diversified portfolios.
  • Fama and French's 2013 five-factor model adds profitability and investment factors, explaining nearly 100% of return differences, and in their 2014 paper 'Dissecting Anomalies with a Five-Factor Model' they showed low beta stocks have positive exposure to these factors.
  • Robert Novy-Marx concluded that the low volatility benefit is effectively an exclusion of unprofitable small cap growth stocks, which could be implemented more efficiently and cheaply.
  • Low volatility strategies have time-varying factor exposure: in a 2012 paper, Pim van Vliet found they were in a value regime about 62% of the time and a growth regime about 38% of the time, with value-regime periods outperforming the market by about 2% and growth-regime periods underperforming by about 1.4% on average.

Details Worth Noting

  • Concrete instructions: The video gives no step-by-step buying or setup instructions. Its actionable guidance is to prefer a broad index fund over low volatility ETFs for most people; if you want to address the factor effect directly, the video's suggested approach is to hold broad market exposure and exclude small cap growth stocks with weak profitability (the approach it attributes to Dimensional Fund Advisors), rather than buying a concentrated low volatility fund.
  • Using USMV (iShares Edge MSCI Min Vol USA ETF) as an example, it had 213 holdings as of May 7, 2019, versus 3,552 for the iShares Core S&P Total U.S. Market ETF (ITOT), reducing diversification.
  • USMV turned over about 25% of holdings annually, while ITOT generally turns over less than 10%; higher turnover increases costs and reduces tax efficiency.
  • ITOT still holds small growth stocks, but they make up only about 2% of its portfolio, so it is not a full exclusion.
  • The speaker notes that low volatility ETFs often sit in a value regime but not always, so investors may get growth exposure at times, which has historically underperformed.

Bottom Line

The low volatility effect is explained by known risk factors rather than free return, so a concentrated low volatility ETF adds factor bets, higher turnover, and fees that a plain index fund avoids.