Battle Of Factors: Low Volatility Versus High Beta

2020 has surprised us all with a number of firsts. Not only did we witness wild swings in the market from one quarter to the next, but we also saw an unusual performance of commonly followed factors. While this blog will not attempt to predict factor performance, it will address recent factor behavior and put this behavior into historical context.

The magnitude of market returns during Q2 2020 was impressive, with the S&P 500® returning 20.5% for the quarter. This comes on the heels of a similarly dramatic, albeit negative, showing during Q1 2020, when the index fell by 19.6%. The whipsawing of the market from one quarter to the next is extraordinary when compared with the historical median S&P 500 quarterly return of 3.5% and a median Q2 return of 3.2% (see Exhibit 1).

(Click on image to enlarge)

Factor performance was just as extreme and, in many cases, nearly a mirror opposite of Q1 2020. The S&P 500 High Beta Index (High Beta) and the S&P 500 Low Volatility Index (Low Volatility) were the noteworthy outliers during Q2 2020. While High Beta staged a strong comeback, Low Volatility lagged the market and was the worst-performing factor.

It is perhaps not surprising that these factors exhibited the behavior that they did in the Q2 2020. After all, High Beta’s historical return dispersion was the highest among the factors analyzed, while Low Volatility’s dispersion was the lowest (see Exhibit 2). The relative magnitude of their respective bounceback in Q2 2020 makes sense in the context of these factors’ historical return dispersions.

(Click on image to enlarge)

In a further display of how anomalous this past quarter was, Exhibit 2 highlights that nearly every factor’s return was at the extreme of its historical distribution, with a notable exception of the S&P 500 High Dividend Index. We wrote earlier about the reasons for the disappointing performance of dividends in Q1 2020[1] (the underperformance of defensive sectors and low volatility, and the outperformance of growth over value). The bounceback of dividends in Q2 2020 was underwhelming, driven by some of the same dynamics that carried over from Q1 2020.

1 2
View single page >> |

Disclaimer: For more information on the risk-adjusted performance of actively managed funds compared with their benchmarks in 2018, read our latest  more

How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.


Leave a comment to automatically be entered into our contest to win a free Echo Show.