Low Volatility Factor: High Valuation

Low Vol Does Not Need to Have Low Vol

July 2017. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • The Low Volatility factor has generated stellar abnormal returns over the last decades
  • Current factor valuations are expensive compared to historical valuations
  • Factor volatility is at record lows and will likely surprise investors going forward


The term “low volatility” has been used increasingly in finance over the last two years, on the one hand for describing the current market conditions and alternatively in reference of the large amounts of low volatility products that have been issued. The later describes investment products that buy stocks with low volatility or beta as academics and finance professionals have concluded that these stocks offer more return for their risk than stocks with higher volatility, which is at odds with traditional finance theory. This phenomena can be explained by several behavioural biases, which are mainly a preference for lottery stocks (think “Tesla”) and restrictions on leverage. In this short research note we will analyse the valuation of the low volatility factor across developed markets (read Value & Quality Factor Valuations).


We construct long and short portfolios by ranking stocks according to their one-year volatility. In the US, Europe, and Japan we take the top and bottom 10% of the stock universes while we take the 20% in the other markets due to smaller stock universes. The portfolios are constructed beta-neutral, which does imply significant net exposure as the long portfolio, containing stocks with lower volatility, is levered up while the short portfolio, containing stocks with higher volatility, is levered down. It’s necessary to highlight that the stock universes in Singapore, Hong Kong, and Australia were quite small before 2000, which does have an impact on the meaningfulness of the results.


The chart below shows the performance of the Low Volatility factor (long / short) across developed markets from 1986 to 2017. We can observe positive performance in all markets and similar the trends. The most significant drawdowns were ex