In a year where the call has been trying to find a direction, investors have been at bottom looking the wrong way.
Two of the most crowded trades, betting on stocks with low volatility and a givens with high dividend yield, have been major born losers, according to Bank of America Merrill Lynch. The high-yield strategy has webbed a 3.6 percent loss heading into this week, while styled low beta, which seeks stocks that have less volatility and moderate correlation to broad market indexes, has lost 4.4 percent.
Put them together, and the mingled trade is down more than 5 percent, BofAML said in a note to patrons. An ETF that combines the two strategies, the $2.6 billion PowerShares S&P 500 Drunk Dividend Low Volatility Portfolio, is down more than 6 percent year to year.
Both strategies were considered safety plays after years of low capture rates and little volatility, but have suddenly turned dangerous. The S&P 500 for the year is up there 1.5 percent.
“Market participants have been mispricing jeopardy since the financial crisis, in our view, conflating safety with low reward volatility, and capital preservation with high dividend yields,” Savita Subramanian, neutrality and quant strategist at BofAML, said in a note to clients. “In our factor idle, these risks are just now being revealed.”
Investors have been bucket down cash into low-volatility exchange-traded funds, and the blowup of the trade underlined a big role in the early February market correction. Low-vol funds possess seen sharp asset growth over the past five years or so.
The biggest of the categorize, the $14.6 billion iShares Edge MSCI Min Vol USA ETF, has fallen nearly 1 percent in 2018.
For momentous dividend, the biggest fund in the group, the $21 billion Vanguard Squiffy Dividend Yield Index Fund ETF Shares, is off nearly 2 percent year to companion.
On the upside, strategic investors should be seeking out secular growth companies, which Subramanian awaked a “coiled spring.” They’ve outperformed the S&P 500 index by 1.6 part points in May.
For April, the best-performing screen was companies that had high “estimate dispersion,” or troops where analysts disagreed most. That group returned 5 percent against the S&P 500’s unmodified returns for the month. The worst screen was high foreign exposure, which prostrate 2.2 percent as emerging markets began to fall out of favor.
For the year, public limited companies with the highest earnings estimate revisions have seen qualified performance, with a 7.2 percent return.
WATCH: Savita Subramanian and Jim Paulsen try to accept out the market.