The world of finance is no stranger to fashion, and Low volatility equity investing has recently attracted serious interest from the investment community. Its popularity has led to doubts regarding the valuation level for this overcrowded arena.

Just look at the current market caps of the most representative ETFs of the low volatility anomaly. If we highlighted the best known, in 2011 they began its launch with about 5 million under management, and currently standing at exorbitant amounts. To get an idea, during its first two years SPLV achieved a daily average inflow of 7.6 million! For its part, in the last year USMV and EFAV have gotten about 4 billion.

These good results ratify the increased investment in low volatility strategies. Papers abound for explanations about its viability in all universes, trying combinations with other premium factors, or delving into the anomaly through the operating performance. But there may also be collateral damage.

Have low volatility stocks really deteriorated in its fundamental valuation?

According to Pim van Vliet, portfolio manager of Robeco Conservative Equities, a generic low-volatility strategy is getting more expensive because there’s high demand due to uncertainty in markets.

We take the universe of S&P 500 in January of 2010 and 2016, and we calculated the ratios of most representative fundamentals value such as the P/B, P/E and TEV/EBITDA. By analysing the behavior of the low volatility stocks relative to the components of the index, we see that in all cases the median has risen considerably. This confirms that the anomaly is more expensive than a few years ago.

Under these circumstances, it is clear that the low volatility has been penalised. So, when creating a portfolio it’s important to make an enhanced selection and to take care with what you buy. After all, not all stocks with low volatility are equal, and returns can be significantly different.