Be Wary Of The Low Vol Factor

The superior performance of low-volatility stocks—the low-volatility anomaly—has been documented to exist in equity markets around the globe. And since its discovery, a good amount of academic research has attempted to determine both its origins and whether or not it will continue to persist.

Among that research is a December 2013 paper, “A Study of Low Volatility Portfolio Construction Methods.” The authors of the study concluded that the reduction in a portfolio’s volatility is driven by a substantial decrease in its market beta, and that low-volatility strategies outperformed their corresponding cap-weighted market indexes due to exposure to the value factor, the betting-against-beta (BAB) factor as well as the duration factor.

In other words, investors were trading one risk (beta) for two others (value and term). This conclusion is consistent with the findings of prior research.

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