CHICAGO (Reuters) – Sometimes the very name of a fund sounds like a security blanket if you’re a risk-averse investor. Case in point: “Managed volatility funds” promise some of the stock market’s upside with a cushion on the downside.
This burgeoning class of more than 400 funds is gaining a gaggle of devotees. There is more than $200 billion invested in them, according to Strategic Insight, up from $31 billion in 2006. While “managed volatility” isn’t well defined, these funds provide a strategy that dampens volatility over time.
So why worry about market volatility when the market continues to head higher and both the Dow Jones Industrial Average and S&P 500 Index keep hitting new highs? Because market downturns are often unpredictable and the overall risk of loss never goes away. Yet while volatility funds provide some cushion from frenetic markets, you pay a price for modest protection.
Take the BlackRock Managed Volatility Investors A fund, which is one of the largest funds in the category with more than $600 billion in assets. The fund has gained about 14 percent for the year through November 22. While that’s less than half the return of the S&P 500 during the same period, keep in mind that the fund is taking long and short positions in the stock market to hedge risk.
Like most of the managed volatility funds, the BlackRock fund is an expensive holding. The “A” share class levies a 5.25-percent front-end sales charge and charges 1.27-percent annually in additional expenses.