outperformance with low beta stocks

Why you can beat the market with low beta stocks

So does our low beta stocks model portfolio. It outperformed the S&P 500 by a margin of 11% over the past year, returning 36%.

What is a low beta stock?

Check out the stocks that make up the Low Beta Stocks model portfolio.

Examples of low beta stocks

Low beta stocks generally are considerably less well known than their high volatility counterparts who are the subject of all the media hype. Examples of low beta stocks include H&R Block 📈 (HRB; Beta: 0.49), a DYI tax preparation service company, Enterprise Product Partners 📈  (EPD;  Beta: 0.42), a leading gas pipeline company, or Arch Capital 📈 (ACGL; Beta: 0.49), a global insurance company.

The opportunity in low volatility stocks

What are the factors that drive the outperformance of low-beta stocks

Behavioral bias

high volatility stocks

Market inefficiencies

Leverage constraints

Many institutional investors, such as mutual funds and pension funds, face leverage constraints and cannot borrow to invest in lowbeta stocks to achieve their desired level of portfolio risk. Instead, they over-allocate to high beta stocks to increase expected returns, which drives up the prices of high beta stocks and suppresses their future returns, leading to better performance for low volatility stocks.

Empirical research

More specifically, research by Frazzini and Pedersen (2014) and others has shown that the performance of low beta stocks can be partly explained by their exposure to other risk factors such as size, value, and quality. Low-beta stocks often have higher quality attributes and lower valuations, which contribute to their superior performance.

The advantages of owning low volatility stocks

Low beta stocks offer two principal advantages for long-term stock investors.

First of all, thanks to relatively lower valuations, low volatility stocks tend to drive portfolio returns, to the point of generating outperformance over the long run.

Check out the stocks that make up the Low Beta Stocks model portfolio.

Secondly, low risk stocks provide stability to portfolios of risk-averse investors as these stocks tend to exhibit lower volatility compared to the overall market. In pratice, this means they experience smaller price fluctuations and are less susceptible to dramatic market swings. During market downturns this is a highly valuable characteristic that can protect an investor’s portfolio.

How to find low volatility stocks

The best way to identify low beta stocks is through the use of a free stock screener. In addition to your typical screen settings, you should set a maximum threshold for beta risk. A maximum beta of 0.6 should give you an attractive opportunity of low volatility stocks to work with.

The case for low beta stocks is clear

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