From the classical CAPM…
The Capital Asset Pricing Model (CAPM), introduced by Jack Treynor (1961), is used by analysts to determine the required return of a financial asset. Its representation is as follows : E(Ri) = Rf + βi[E(Rm) – Rf] The basis of this model is to assume that a risk adverse investor should aim a return composed of a riskfree rate, which compensate him for the time value of money (Rf), and risk premium to remunerate him for bearing systematic risk (βi[E(Rm) – Rf]). Numerous academic studies have demonstrated that some factors could explain a large part of what was previously seen as alpha (or skills). 

… To the Low Volatility Factor
Standard capitalizationweighted indices, such as the S&P 500, or NASDAQ Composite, have a huge Achilles heel. Indeed, their methodologies tend to overweight rocket stocks (i.e. AT&T), which could collapse as soon as the bubble’s popped. The rational behind the Low Volatility Factor’s empirical studies lies in behavioural tendency to seek for lower risk investments to face headwind environment. Thus, low volatility stocks tend to have a value bias, which are unlikely headlines hot stocks and outperformed in previous financial turmoil’s. 

How the S&P 500 Low Volatility Index takes advantage of this factor
The S&P 500 Low Volatility Index is devised to select the 100 lowest volatile stocks within the S&P 500 Index, without sector bias. Then, the 100 stocks’ weights are inversely linked to their own volatility. In short, the higher the volatility, the lower the weight in the index. The formulation of this methodology is as bellow : Wi = [1/Volatility i] / [Somme 1/Volatility i] This approach consistently outperformed on a risk adjusted basis, with an annualized performance up to 9,5% and a volatility of 10,9%. 

Did the herd instinct take the Volatility Factor to pieces?
What we learned from financial market’s history is that as soon as a trading strategy is widespread, the crowd rush into it and eventually the anomaly vanish. As the term “Smart Beta” has been popularised through investment publications, a wise investor should be concerned about the persistence of the Volatility Factor, especially on an American standpoint. Despite the above concerns, the S&P 500 Low Volatility Index TR outperformed the traditional S&P 500 TR by 3,79% in 2014 and by 0,62% in 2015, as of October 2015. 

Statistics of the S&P 500 Low Volatility Index
The major features of this index is its capacity to persistently outperform on a risk adjusted basis. On a 10 year basis, the index’s annualised performance was close to 9,5%, compared to the S&P 500 TR’s 7,8% figures. Simultaneously, the 5 years annualised volatility was as below as 9,2% compared to 11,8% for the S&P 500 TR, as of October 31, 2015. And well, on a 3% Risk Free rate basis, the index’s Sharpe Ratio was close to 0,60, or twice the S&P 500’s one. 

SPDR S&P 500 Low Volatility UCITS ETF (SPY1 GY)
The “SPDR S&P 500 Low Volatility” ETF is an ETF that tracks the S&P 500 Low Volatility Index (SP5LVI). The ETF aims to hold all the 100 stocks included in the benchmark, with a similar weighting allocation. The fund’s normal target tracking error is as high as 1%. At the end of October, the ETF’s portfolio included the whole benchmark’s 100 stocks and displayed a 3 years annualised Tracking Error of 0,75%, a dividend yield of 2,37%, while its 3 years annualised standard deviation was close to 9,9%. As for its underlying index, financials represent the largest weight of the portfolio (34,9%), while consumer staples is the second (21,7%). 
Sources: S&P Capital IQ, State Street Global Advisors SPDR, CAIA Association 
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