In a world of low volatility, one would expect a fund comprised of low-volatility stocks to have performed well. And in 2014, that has been the case for the most part.
Just to review, the SPLV is an index of the 100 S&P 500 stocks with the lowest realized volatility over the previous 12 months. It rebalances quarterly, and is generally a good proxy for the "Steady Eddie" strategy highlighted above.
It has, indeed, done quite well so far in 2014 (click chart to enlarge).
Chart courtesy of TD Ameritrade
That, of course, makes sense in light of the bond action this year, if you subscribe to the correlation theorized above. And it's pretty consistent with the February-April flight out of momentum. Even the most volatile of S&P 500 stocks aren't exactly dominated by high flyers, but they're still high-beta on a relative basis. So, it figures that SPY underperformed for a few months before that whole trend petered out in May.
The underperformance issue with these low-volatility pups does seem to crop up a couple of times every year, but generally speaking, it's not a bad thing. With small-cap/momentum/high-beta getting slammed earlier this year, one of two things had to happen: either more stable, big-cap names would follow, or the high-beta would stop getting pounded. But in both cases, low volatility stood to underperform. Fortunately (if you're net long or bullish), it seems to have resolved with stabilization in small-caps/high-beta. SPLV is clearly still acting well; it's only lagging on a relative basis.
Now, if bonds weaken, it does make sense that this underperformance will get worse. But again, that sounds like a good thing. It implies the economy is doing better, which suggests that growth names will take the baton again. And that, generally speaking, leads to a better rally.
Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.