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Look Out Tech - Goldman Is Back, Warns ‘Low Vol’ Is Not Actually ‘Low Vol’

Heads up FAANG, or FAAMG, or whatever the hell the acronym is these days. Goldman is back on Tuesday with an update to the thesis that underpinned the now infamous FAANG note that triggered a mini-rout in tech on June 9.

You’ll recall that the most important takeaway from the bank’s analysis was that tech stocks have become synonymous not only with growth and momentum (that’s kind of tautological), but also with low-vol.

Here’s the important quote:

If FAAMG was its own sector, it would screen as having the lowest realized volatility in the market.

How can low vol create a problem? Investors are increasingly focused on “volatility-adjusted” returns as they are deciding which stocks to invest in. We believe low realized volatility can potentially lead people to underestimate the risks inherent in these businesses including cyclical exposure, potential regulations regarding online activity or antitrust concerns or disruption risk as they encroach into each other’s businesses.

Mechanically, we expect that as the realized volatility of a stock drops, more passive “low vol” strategies buy the stock, pushing up the return and dampening downside volatility. The fear is that if fundamental events cause volatility to rise, these same passive vehicles will sell and exacerbate downside volatility.

In other words, these tech stocks are starting to get treated like something they are not by...