Given increased economic headwinds and the length of the market runup, it’s not surprising investors are flocking to what they hope will be steady-performing names. Year-to-date,* an estimated $13.4 billion has poured into exchange traded funds (ETFs) focused on low-volatility equities—making this category a top destination for factor investing dollars.

While stampeding toward what they hope will provide muted price movements, investors may be missing some key warning signs that could translate into painful bumps in the quarters ahead. Top among them is weakening balance sheets. A look at the chart below highlights how net debt levels relative to earnings before interest, taxes, depreciation and amortization (EBITDA) for companies in the minimum volatility ETF have skyrocketed and now stand at the highest point in the last 20 years.

In the long run, we believe it’s not the volatility of share price that determines whether an investment is good, it’s valuations, the quality of the underlying business, and the strength of its balance sheet.

Disclosure:

*August 16, 2019

Past performance does not guarantee future results.