Disclaimer for charts: Investors cannot invest directly in an index. Past performance is no guarantee of future results. Strategies striving to mirror an index will have different returns due to tracking error, management fees and trading expenses. STIR Research is intended for a professional audience for informational purposes only and is not a recommendation to buy or sell any security, nor is it intended as specific advice for any individual investor’s portfolio. STIR is NOT a registered investment advisor or broker-dealer. STIR provides experienced independent quantitative research.

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Do rising dividends and low volatility ETF’s offer a smoother investment experience? Typically the answer is yes. In small to intermediate market declines of 10%, 15 or even 20%, they have proven to have smaller declines.

However it is a myth, that Low Volatility or Dividend Paying ETF’s cannot suffer losses of 40% to 50%! The chart below illustrates the losses during the financial crisis of 2007-2009.

The LVRD Index is actively risk managed (looked at daily) striving to avoid only major bear market declines and to fully participate in rising markets. While all declines cannot be 100% avoided, the risk managed LVRD Index strives to avoid 40% to 50% of the major bear market declines and to participate in 80% or more in rising markets.

To achieve those goals, the index follows a Rule Set that employs a number of time-tested quantitative risk management indicators.

  • The primary risk management indicator (Individual Fund Signal-IFS) tracks the trend and performance of the entire portfolio daily. STIR’s research team has over three decades of experience of employing the IFS. It avoided the crash of 1987, and the majority of the bear market declines in 2000-2002 and again in 2007-2009. The IFS has been just as quick to turn bullish and fully participating in the bull market runs of the 1990’s, 2002-2007 and again from 2009 to current all-time highs.

  • After a bearish trend reversal in the IFS, the LVRD Index will move from 100% invested to just 25% invested. The 75% cash position is allocated to a short-term U.S. Treasury ETF or money markets.

  • At that point, the Rule Set incorporates two other risk management indicators (one intermediate term the other shorter term).

Overall, the Rule Set goal is to make it hard to exit for tax efficiency and therefore avoiding small whipsaws while still avoiding the majority of major market declines and quick to get back in to participate in new market uptrends. With a disciplined application of the Rule Set, the LVRD Index strives to manage risk which can lead to higher returns with smaller drawdowns.