- 1Low-volatility stocks have historically delivered equal or better risk-adjusted returns than high-volatility stocks
- 2This contradicts the traditional risk-return tradeoff (more risk = more reward)
- 3Low-vol stocks outperform most dramatically during bear markets
- 4Our Stability factor rewards stocks with lower realized volatility
- 5Combining low volatility with value and profitability enhances returns further
#The Low-Volatility Anomaly
In theory, riskier investments should earn higher returns — that's the fundamental premise of finance. But the data tells a different story.
Stocks with the lowest volatility have historically delivered: - Similar or better total returns than high-volatility stocks - Significantly better risk-adjusted returns (Sharpe ratio) - Much smaller maximum drawdowns
This "low-volatility anomaly" has been documented across every major stock market and persists over decades.
Read about the low volatility anomaly →
#Why Low Volatility Works
1. Leverage Constraints
Most investors can't use leverage. To juice returns, they buy volatile stocks instead. This pushes volatile stock prices up and expected returns down.
2. Lottery Preferences
People overpay for lottery-like payoffs. High-volatility stocks are essentially lottery tickets — most lose, but a few make huge gains. The average result is poor.
3. Benchmark Hugging
Professional fund managers are measured against benchmarks. Owning low-volatility stocks that might underperform in bull markets is a career risk, even if it's a better long-term strategy.
4. Neglect
Low-volatility stocks (utilities, consumer staples) are "boring." They get less analyst coverage and media attention, creating persistent mispricing.
#What Makes a Stock Low Volatility?
We measure volatility as the standard deviation of daily returns over the trailing period. Low-volatility stocks share common traits:
| Characteristic | Why It Reduces Volatility |
|---|---|
| Stable revenue | Predictable cash flows = predictable stock price |
| Regulated industry | Less competitive uncertainty |
| Dividend payer | Income provides a return floor |
| Low leverage | Less financial risk |
| Non-cyclical products | Demand persists through recessions |
| Large market cap | More institutional ownership, more liquidity |
#Low Volatility by Sector
| Sector | Volatility Level | Why |
|---|---|---|
| Utilities | Very Low | Regulated monopolies, stable demand |
| Consumer Staples | Low | Essential products, inelastic demand |
| Healthcare | Low-Moderate | Pharma is stable, biotech is not |
| Real Estate | Low-Moderate | Lease income stability |
| Technology | High | Growth expectations create swings |
| Energy | High | Commodity price sensitivity |
| Biotech/Crypto | Very High | Binary outcomes, speculation |
#Performance During Market Crashes
Low-volatility stocks shine brightest when the market falls:
| Market Event | S&P 500 | Low-Vol Stocks | Benefit |
|---|---|---|---|
| 2008 Financial Crisis | -37% | -20% | +17% |
| 2020 COVID Crash | -34% | -25% | +9% |
| 2022 Bear Market | -19% | -10% | +9% |
Approximate figures based on low-volatility factor performance
Losing less means you need less to recover. A 37% loss requires a 59% gain to get back to even. A 20% loss only needs 25%.
#View Our Stability Rankings
Sort by Stability factor to find the most consistent, least volatile stocks in our universe.
For maximum benefit, combine low volatility with value and profitability factors — stable, cheap, high-quality companies tend to deliver the best long-term outcomes.
Last updated: February 6, 2026