This isn't how bull markets are supposed to work.
In times of rising prices, more volatile stocks are supposed to outperform. After all, from a theoretical perspective, the whole benefit of holding on to more volatile names is that they produce more generous returns.
But over the past five years, that simply hasn't happened. S&P's index of the 100 least-volatile S&P 500 stocks (rebalanced quarterly) has risen 78 percent over the past five years, nearly matching the S&P 500's 95 percent gain.
Because less-volatile stocks tend to pay out a fatter dividend, the low volatility index has gotten even closer on a total-return basis, rising 108 percent versus a 117 percent gain for the S&P 500. And all while trading with less volatility and a significantly lower beta.
"It's pretty striking," remarked David Seaburg, head of equity sales trading at Cowen & Co., in a Friday "Power Lunch" interview. "It goes to show you that risk doesn't necessarily mean better returns. You can stay in some of these really low-beta names or low-volatility names and outperform the market over a long period of time."
The point is that less-volatile stocks don't have to beat or even keep up with the S&P 500 in rising markets. As long as they come close, their superior performance in falling markets will likely make them better investments in the long term.
That strikes at the heart of the critical finance theory which holds that the volatility of a stock, or at least how volatile it is in relation to its correlation with the market (the measure captured by beta) should determine its returns. But the performance of low-volatility proves that, at best, there are some serious exceptions to the rule.