Finding opportunities through the low-volatility anomaly
Equities with lower than average volatility have delivered superior returns, both absolute and risk-adjusted, over a period spanning many decades. Investors should consider an allocation to strategies that take advantage of the so-called low-volatility anomaly.
Low-volatility stocks — those with less price variability than the average stock in the market — deliver higher returns than other stocks. This is an empirical fact, at least insofar as the last 90 years or so are concerned. And it is one of the most surprising market anomalies (a result not predicted by theory) ever found. It’s surprising because, as almost everyone believes, return is supposed to be related to risk so that higher-risk stocks should deliver higher returns and lower-risk stocks should deliver lower returns. The low-volatility anomaly stands this sensible theory on its head and, if it persists in the future, may provide a remarkable opportunity to make outsize returns.