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Managed volatility investing strategies are designed to mitigate some of the risks associated with uneven stock market movements. Managed volatility mutual funds have become increasingly popular for helping investors to balance downside risk in their portfolios without sacrificing returns during periods of market disruption. If you’re wondering what a managed volatility fund is, how it works or why you might consider investing one, this guide explains some of the most important things to know.

What Is Managed Volatility Investing?

The basic premise of this type of investing strategy is to help investors insulate themselves against wide swings in the stock market. The goal of managed volatility investing is to continue delivering high returns in a portfolio, while minimizing the downside risks that disruptions in the stock market can trigger. This helps provide stability with your investments while making its return profile more efficient, despite what’s happening with stock prices.

Managed volatility is an example of an outcome-based strategy, where the focus is on creating a portfolio that meets an investor’s needs. In this case, the desired outcome is maintaining returns while creating a portfolio that’s less sensitive to volatility. That might be important to you if you have a lower risk tolerance or if you’re shifting away from the accumulation phase with your portfolio and getting nearer to the phase when you’ll start drawing an income from your investments.

What Are Managed Volatility Funds?

A managed volatility fund is a mutual fund that’s built around managed volatility strategies. These funds are most often actively managed, meaning there’s a fund manager at the helm making investment decisions about which securities to buy and sell. That’s different from something like an index fund, which uses a passive investing strategy. With an index fund, you’re just trying to match the stock market’s performance, rather than beat it. With an active strategy, the objective is to outperform the broader market as a whole.

Managed volatility funds seek to deliver returns that are close to or exceed a specific market benchmark, such as the S&P 500 or the Nasdaq Composite, but with less risk. Most often these funds are equity-focused, meaning they generally concentrate the majority or all of their holdings on stocks rather than bonds. Those stock holdings can be diversified across small-cap, mid-cap or large-cap companies, growth stocks and value stocks, domestic or international companies. These funds can also invest in blue chip stocks, which can deliver reliable returns along with regular dividends.

Since these funds are actively managed, the fund manager can shift allocations as needed to keep pace with market trends. For example, during periods when volatility is peaking in the stock market, a fund’s allocation might shift away from equities and increase holdings toward bonds or fixed income. On the other hand, when volatility is low the fund might offer investors a 100% low-volatility equity exposure.

Fund performance can be influenced by market returns. If volatility is low overall, then managed volatility funds can perform well in a bull market scenario. When a bear market moves in, managed volatility funds can continue holding their own when stocks or funds that are more susceptible to volatility begin to falter.

Pros and Cons of Managed Volatility Investing

The biggest advantage associated with this type of investing strategy is the ability to curb the potential for losses from downside risk. Utilizing these funds in your portfolio could make riding out market downturns less stressful since they have downside protection built in.

That doesn’t mean that you can’t still lose money with managed volatility funds, but the risk you’re taking on may be comparatively less than a fund that doesn’t rely on this kind of strategy. A fund that has an experienced fund manager with a solid understanding of how to navigate periods of volatility could exceed performance expectations.

One downside associated with managed volatility as an investing strategy is that it may be more expensive to invest in compared to other fund options. For instance, you might be looking at an expense ratio in the neighborhood of 0.75% to 1% to invest in one of these funds. That’s typical of actively managed funds, but compared to the 0.20% you might pay for a passively managed fund, it’s a big leap in cost. So you have to consider how justifiable the expense is, based on the fund’s returns.

That leads to another issue with managed volatility funds. While some have been around for more than a decade, many of them are only five to 10 years out from their inception. That can make it harder to evaluate whether a fund is worth your while if you’re looking to make a long-term buy-and-hold move. The shorter a fund’s track record is, the more difficult it becomes to discern how skilled the fund manager is at making investment calls.

Finally, some managed volatility funds can have a higher barrier to entry when it comes to the minimum initial investment. While traditional mutual funds may only require $1,000 to $3,000 to invest, some managed volatility funds require at least $100,000 to invest. That could put them out of reach for the everyday investor.

How to Invest in Managed Volatility Funds

Like any other mutual fund, you may be able to purchase shares of managed volatility funds through your online brokerage account. When weighing one fund against another, make sure you’re doing an apples-to-apples comparison. For example, if you’re looking at a U.S. managed volatility fund don’t compare it to a global managed volatility fund since they’d invest in a completely different group of holdings.

Factor in the fund’s expense ratio and its historical performance, as well as the reputation and skill of the fund manager. Take a look at the fund’s underlying holdings to see how or if assets are spread across different sectors and market capitalizations. Then compare those holdings to your current asset mix to see if introducing managed volatility funds would increase diversification, improve returns and take some of the risks out of your portfolio.

The Bottom Line

Managed volatility is all about using low-volatility strategies to produce maximum returns. While this strategy may not be right for every investor, it could be appropriate for someone who’s more conservative when it comes to risk but still seeks the best return profile possible from their investments. Managed volatility funds can offer an easy way to use this strategy but just be aware of how much is required to invest and what you’ll pay in fees.


  • Consider talking to a financial advisor about whether investing in a managed volatility fund is right for you. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.
  • If you’re wondering whether managed volatility funds are right for you, consider what your objectives are for investing and your risk tolerance. Also, keep in mind thatrisk tolerance and risk capacity are two different things. Here is a helpful tool to align your risk tolerance with an appropriate asset allocation.

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Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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