How is ‘Low Volatility’ measured?
With a wide array of options there is no standard approach that has emerged as a dominant one among investment managers and index providers. And while standard deviation or related measures are quite popular, the periods of computation differ significantly. The table below describes the different types of low volatility factor indices across the world and the parameters used in their construction.
| Index Details |
Factor Characteristics |
Methodology |
|
Index Name: S&P 500 Low Volatility Index (US)
Index Provider: S&P Dow Jones Indices LLC
|
Standard Deviation of Daily Price Returns (Last 1 Yr / approx 252 trading days)
|
Tilt the S&P 500 Index (capitalisation-weighted) towards 100 constituents with lowest volatilities, ranked inversely in terms of their realised volatilities.
|
|
Index Name: MSCI USA Minimum Volatility Index (USD)
Index Provider: MSCI Inc.
|
Overall portfolio variance using individual variances and covariances between returns of constituents in the Parent Index
|
Tilt MSCI USA Index (capitalisation-weighted) towards an optimised portfolio which reduces the portfolio’s overall volatility
|
|
Index Name: Nasdaq Factor Family US Low Volatility Index
Index Provider: Nasdaq, Inc
|
Volatility Change Score and Volatility Strength Score based on realised standard deviation
|
Tilt Nasdaq US 500 Large Cap Index (capitalisation-weighted) towards 50 constituents having the lowest Volatility Strength Scores, with their weights being inversely proportional to the realised volatilities
|
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Index Name: Nifty 100 Low Volatility 30 Index
Index Provider: NSE Indices Ltd
|
Standard deviation of daily price returns (log-normal) over last 1-Yr period
|
Tilting Nifty 100 Index (capitalisation-weighted) towards 30 constituents with lowest volatility scores, with their weights being inversely proportional to the realised volatilities
|
Source: FTSE Russell, Research Affiliates, LLC, MSCI Inc, S&P Dow Jones Indices LLC, Nasdaq, Inc & NSE Indices Ltd
