ChuckJaffe

Show me a guy wearing a belt and suspenders, and I will show you someone who a) is a pessimist and b) fell for a sales pitch that made him look both silly and redundant.

The same can be said for a lot of the investors looking at low-volatility and “managed-volatility” mutual funds and exchange-traded funds. They’re going for a good-looking strategy that, for some, will be redundant and ill-fitting.

Volatility is seemingly on every investor’s mind these days, because the one thing prognosticators can agree on this year is that whatever happens in the markets — rally, setback or a lack of direction — will come with heightened volatility. Certainly the first month of 2015 felt particularly volatile; while the S&P 500 lost roughly 1.75% for the month, it has seemingly moved that amount, or close to it, a few times every week in January.

But that nausea-inducing volatility is a daily symptom of the market. Moreover, avoiding that churning is not really the job of the low-volatility or minimum-volatility products that Wall Street has introduced in the last few years, because they’re focused on providing a smooth ride for the long run.

The idea here is a simple one: Accept a little less in returns, but experience less volatility. Thus, a low-vol fund should lag the market slightly when times are good, and beat it by a bit when there’s a sharp downturn.

If you want proof that the concept sells, consider that Lipper counted over $150 billion in assets floating around in issues with volatility as a focus of their investment process as of the end of December.

For proof that the situation is confusing and hard for investors to properly decipher, consider that Lipper data covered about 300 funds spread over 64 different fund classifications, falling into everything from plain-vanilla growth funds to alternative strategies, absolute-return funds and much more. And that’s without the many popular funds that are widely considered low-volatility issues, without anything specific in the name or prospectus.

If you simply search for funds with “low volatility” in their name — regardless of classification — you will find about 40 traditional funds and half as many ETFs. Most have track records that run for less than three years, meaning they haven’t been forced to prove how they’ll perform in a down market.

There’s no telling how many of them are not really providing what investors expected, at least until the market next takes a significant tumble that lasts at least a calendar quarter. TDAM Global Low Volatility Equity TDLVX, +0.99%   is tops among “world stock funds” over the last year, according to Morningstar, but Invesco Global Low Volatility GTNDX, +1.04%   is near the bottom of the same class; there’s no guarantee that low-volatility equals “beating the competition.”

Investors shouldnt turn page on past 15 years

That’s in part because there are many ways to achieve “low volatility” in a fund.

Historically, if you build a portfolio of low-volatility stocks, you get market-like returns with lower risk. That could explain the popularity of products like the iShares Core S&P 500 ETF IVV, +1.25%  , the PowerShares S&P 500 Low Volatility ETF SPLV, +1.73%   and iShares MSCI USA Minimum Volatility fund USMV, +1.31%  .

These funds add exposure to stocks that move around less on a daily basis than the entire market, but experts agree they are not really “day-to-day products.” On any given day, if the market tanks, the investor may not see an appreciable difference than if they owned the relative index fund.

Using low-vol funds allows investors to “stay invested in the market even when they expect it to be choppy, and have greater confidence that they will participate in much of the gains on upside but less of losses on downside,” said Todd Rosenbluth, director of mutual fund and ETF research at S&P Capital IQ.

Beyond the possibility to disappoint investors on any given day, there can be structural issues. While the simplest strategies buy only low-volatility stocks, some funds use derivatives and other complex hedging tools to reduce market effects. And since most of these funds were created after the financial crisis of 2008, they haven’t been stress-tested by a real bear market yet.

Here’s the belt-and-suspenders problem: Most index fund investors (and more fund investors generally) buy funds to capture the long-term performance of the market or an asset class.

If you’re committed to a core holding as a cornerstone of a portfolio for a decade or more, sacrificing long-term performance to avoid daily or monthly swings is overly pessimistic. You’re giving up return you sought from the index to feel better along the way, during a time when your intention was to let the money ride.

“Fund investors shouldn’t be concerned about day-to-day volatility and, yet, a lot are,” said David Hyland, a finance professor at Xavier University. “If watching these funds — and not seeing them move much — gives you more confidence and keeps you buy-and-hold, maybe that’s good.…But you’re buying funds to hold them and capture the market’s long-term return; if you’re confident in that strategy and aren’t at risk of selling any day when the volatility scares you, I’m not sure a low-volatility version is worth it.”