Low-Vol ERP Shines Amid a Struggling U.S. Stock Market — Evening Brief – 03.26.25
The U.S. equity market has faced a challenging year, with the broader indices showing modest declines year-to-date through Wednesday’s close. However, the low-volatility equity risk premium (ERP) has bucked this trend, delivering a standout performance and outpacing the market by a wide margin. This divergence highlights the resilience of low volatility approaches in a rocky environment.
The ERP measures the extra return investors demand for holding stocks over “risk-free” assets like the U.S. 10-year Treasury, and low-volatility strategies aim to capture this premium with less downside risk.
The iShares MSCI Minimum Volatility ETF (USMV) has gained 4.9% year-to-date in 2025, significantly outpacing other equity strategies and easily surpassing the broader market’s 1.5% decline, as measured by the SPDR S&P 500 ETF (SPY). For context, low-volatility ETFs like USMV focus on stocks with a track record of stable price movements, delivering returns comparable to the market but with less volatility, a strategy paying off this year.
The low-volatility ERP’s strength in 2025 underscores its role as a haven amid uncertainty—think debt ceiling worries (CBO’s August/September deadline).
Investor sentiment across markets is grappling with significant uncertainty tied to President Donald Trump’s proposed tariffs, slated to begin on April 2, 2025. However, a rally this week—spurred by Trump’s comments on Monday, suggesting not all planned tariffs would be enforced—has offered a temporary reprieve.
The S&P 500’s recent lift—call it “cautious optimism”—may narrow the gap if tariff relief holds. But USMV’s 4.9% gain versus SPY’s 1.5% loss shows low-volatility’s staying power in today’s uneven landscape. Its bullish technical signals suggest room to run, especially if volatility spikes again.
The economy, markets, and Federal Reserve are in limbo until April 2 or beyond. A lighter tariff load could unleash SPY and dent USMV’s relative edge; a full rollout risks stagflation, bolstering low-vol’s haven status. For now, both are waiting for the tariff fog to lift.