Factor Spotlight
Factor University

Is Volatility’s Reign Coming to an End?

Volatility has spent almost the whole of 2020 terrorizing investor portfolios as it soared on a rocket ship of positive performance. From January 2020 to its peak in February 2021, we saw this factor rise by almost 20% on a cumulative basis.


Volatility is a factor that typically exhibits severe negative premia, and its advance has caused havoc for low volatility investors or anyone managing a portfolio to avoid Volatility exposure. However, since the peak in February, Volatility has plummeted, losing much of its 2020 gains by May 2021.

While this factor has shown a slight rebound over the past month (until a sharp fall this week, as seen in this week's market tables), this behavior has left us wondering: Is Volatility re-normalizing?

The Volatility Reckoning of 2021

To assess the trends in Volatility, we will borrow from past analyses, where we used the Russell 3000 universe to build "High Volatility" and "Low Volatility" portfolios. These portfolios are designed to represent the stocks with high and low exposure, respectively, to the Volatility factor in the Axioma US 4 Medium Horizon risk model. The High Volatility portfolio equal-weights stocks with exposure greater than 1 to the Volatility factor, while the Low Volatility portfolio equal-weights stocks with Volatility exposure less than -0.5. As a methodology note, we used a larger absolute exposure threshold for the Low Volatility portfolio to ensure we had a sufficient number of assets in the universe.

The last time we visited Volatility, we highlighted that Volatility's surprisingly stellar performance appeared to be driven more by low Volatility names severely underperforming than high Volatility names outperforming. This particular trend was a significant shift from the prior decade, where the low Volatility names, propelled by the low Volatility investing phenomenon, showed massive returns.

To help recollect these two insights, below, we show the performance of the High Volatility and Low Volatility portfolios from 2007 to 2019 and Jan 2020 to Sep 2020.


In the chart above, we see that from 2007 to 2019, the Low Volatility portfolio outperformed both the High Volatility portfolio and the Russell 3000 by orders of magnitude.


However, when we look at these same portfolios from Jan 2020 to Sep 2020, we see a very different trend, with the Low Volatility portfolio drastically underperforming.

Since the time of our last analysis in September 2020, we see that high Volatility names have taken a much more active role in the performance of the Volatility factor.


From Sep 2020 to the Volatility factor performance peak in Feb 2021, we make two interesting observations. First, though the Low Volatility portfolio still underperforms the broad market and the high volatility names, the performance gap is significantly smaller than what we saw in the first part of 2020.

However, the second - and perhaps more critical - observation is that the High Volatility portfolio skyrocketed during this period, with a performance of almost 90% compared to the Russell 3000 return over this period of only 20%.

Turning our attention to the time since February, we see that as the Volatility factor performance tumbled downward, the High Volatility portfolio followed suit to the tune of over -12% performance. Moreover, the Low Volatility portfolio continued its rise, now outperforming the Russell 3000 by more than 3% from Feb 2021 to the present date.


After 2020’s events threw Volatility into an unusual upward surge, the trends highlighted above point to a possible reversion of the Volatility factor back to ‘normal.’

Is Low Volatility Back in Style?

As we’ve noted in the past, the behavior of high vs. low volatility names has significant implications for the future of low volatility investing and, more generally, for how investors manage portfolios to the Volatility factor. Though 2020 proved to be a rough time for low volatility ETFs, ETF.com reports that assets for SPLV, one of the low volatility ETF favorites, have returned to pre-COVID levels just this past week. Thus, it appears that the market may be back to favoring low volatility; alternatively, as our analysis above shows, high volatility may be re-emerging as the villain the market loves to hate.

In next week’s Factor Spotlight, we’ll continue our sleuthing into Volatility’s behavior in attempts to identify where Volatility may be going from here.

US & Global Market Summary

US Market: 07/06/21 - 07/09/21

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US Stock Market Cumulative Return: 7/6/2021 - 7/9/2021
  • All three major US indexes ended the week at all-time record highs, highlighting a powerful rebound in equities one day after notching the worst daily drop since June 18.
  • Stocks climbed on Friday as President Joe Biden issued an executive order to limit corporate dominance and spur competition.
  • Declines on Thursday were attributed to worries about the global economic recovery amid the spread of the delta variant of COVID-19 and a Treasury buying frenzy sending long-term yields sharply lower.
  • The Labor Department reported that new state unemployment claims held near pandemic lows while the number of Americans collecting continuing payments fell sharply in late June as many states acted to curtail jobless aid.
  • The CDC estimated that the Delta variant now accounted for more than half of new infections in the United States.
  • The 2nd quarter earnings season kicks off in the week ahead, with reports from major financial companies.

Normalized Factor Returns: Axioma US Equity Risk Model (AXUS4-MH)

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Methodology for normalized factor returns

  • Profitability continues to show signs of upward movement away from its 6/21 trough, finishing atop this week’s leaderboard.
  • Earnings Yield substantiates that pre-holiday resistance after a brutal free-fall was no fluke and ends the week just off the pole position.
  • Growth rose by +0.18 standard deviations and moved further into Overbought space.
  • Momentum eked out a tiny gain this week following a a string of negative movements.
  • Market Sensitivity’s 2-month winning streak is history as it finishes in the negative for the first time since mid-May.
  • Today’s headliner Volatility’s one-month sprint into Extremely Overbought territory came to an end as it finishes the week at the bottom of the US leaderboard.
  • US Total Risk (using the Russell 3000 as proxy) decreased by 22 basis points.

Normalized Factor Returns: Axioma Worldwide Equity Risk Model (AXWW4-MH)

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Methodology for normalized factor returns

  • Earnings Yield most recent status as an Oversold factor is no more as it rockets into positive territory and this week’s top position at +.13 SD above the mean.
  • Global Growth continues to blaze a positive trail, moving further above its historical mean.
  • Profitability bounced back after its recent plummet into Extremely Oversold territory and ends the week at -2.08 SD below the mean.
  • Exchange Rate Sensitivity continued to decline away from Overbought space and now sits at the precipice of negative territory at +0.05 SD above the mean.
  • Value continued its string of losses by falling another -0.36 standard deviations and approaches Extremely Oversold designation.
  • Global Volatility fell hard following its recent climb, and like the US, it finishes the week as the biggest loser.
  • Global Total Risk (using the ACWI as proxy) decreased by 31 basis points.


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