Volatility Control Indexes Prove Capable of Stabilizing Investment Performance

A category of investment indexes is enabling agile adjustments across a combination of assets – like cash or bonds on the low-risk side, and stocks on the high-risk side – in a single fund, typically an annuity.

With these volatility control indexes, also known as risk control indexes, investors decide how much volatility they are comfortable with. Once the target is set, stocks are sold and bonds are bought when the equity market becomes too volatile for comfort. The reverse occurs when the stock market calms down.

This contrasts with a conventional balanced portfolio approach in which investors may allocate 60% to stocks and 40% to bonds.

Volatility control indexes tap into the lack of correlation between volatility and equity returns.

“A high-volatility regime can be used as a potential signal to rebalance and de-risk your holdings, and vice versa,” explains Arsen Arutyunov, vice president, sales at quantitative analytics and technology provider Numerix.

These indexes are said to virtually eliminate a host of investment and regulatory risks. But there are also potential pitfalls, ranging from mistiming the market to contagion...