Practical analysis for investment professionals
12 July 2021

Low- or High-Volatility: Which Wins the Return Battle?

When it comes to volatility, finance has two schools of thought: The classical view associates greater risk with greater reward. The more risk a portfolio takes on, the more potential return it may earn over the long run. The more modern perspective takes the opposite view: The lower a security or portfolio’s risk (or volatility), the higher its anticipated return.

This second view, often called the “low-volatility anomaly,” has propelled the introduction over the last 10 years of hundreds of exchange-traded funds (ETFs) and mutual funds that design equity portfolios with the goal of minimizing volatility.

So which is it? Are low-volatility or high-volatility strategies the better choice when it comes to equity returns?

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To answer this question, we used Morningstar Direct data to examine the returns of all low- and high-volatility equity mutual funds and ETFs over the past decade. First, we collected performance data from all US dollar-denominated equity mutual funds and ETFs whose objective is to either minimize volatility or to invest in high-volatility stocks. These low-volatility funds were often named “low beta” or “minimized volatility,” while their high-volatility counterparts were dubbed “high beta.”

We then analyzed how these funds performed relative to one another on a post-tax basis in the United States, internationally, and in emerging markets.

Our results were clear and unequivocal.

The first striking takeaway: US high-volatility funds did much better than their low-volatility peers. The average high-volatility fund earned an annualized return of 15.89% on a post-tax basis over the past 10 years, compared to just 5.16% over the same period for the average low-beta fund.


Low Vol./Low BetaPost-Tax Annualized Return (10 Years) Post-Tax Annualized Return (Five Years) Volatility
US5.16%7.83%11.93%
International/Global2.51%4.68%12.58%
Emerging Markets0.11%0.56%15.02%
High Vol./High Beta Post-Tax Annualized Return (10 Years) Post-Tax Annualized Return (Five Years) Volatility
US15.89%14.33%21.49%
International/Global5.81%6.21%17.39%
Emerging Markets4.55%8.04%19.54%

When we broadened our examination beyond the United States, we found similar results. Funds that focused on low-volatility international stocks averaged a post-tax annual return of 2.51% over the past 10 years compared to 5.81% for high-volatility funds over the same time period. 

The outperformance of riskier stocks was even more pronounced in emerging markets, with high-beta funds outpacing low-beta funds 4.55% to 0.11% over the last decade.

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Indeed, most low-volatility funds didn’t even match a broad market index. The average S&P 500 focused mutual fund or ETF delivered 11.72% and 10.67% on an annual basis over the past five and 10 years, respectively, well in excess of what low-volatility funds as a class have delivered.

All told, whatever the conceits of the low-volatility anomaly, high-volatility mutual funds and ETFs have earned considerably higher returns over the past 10 years. Whether this trend continues over the next 10 years or was itself an anomaly will be a key development to watch.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images / IncrediVFX


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About the Author(s)
Derek Horstmeyer

Derek Horstmeyer is a professor at George Mason University School of Business, specializing in exchange-traded fund (ETF) and mutual fund performance. He currently serves as Director of the new Financial Planning and Wealth Management major at George Mason and founded the first student-managed investment fund at GMU.

Ana K. Garcia

Ana K. Garcia is a senior at George Mason University pursuing a finance major. She is expected to graduate in August 2021, and is currently a vice president of the Montano Student Investment Fund in the Investment Committee. She works in the banking industry, and following her graduation, plans to pursue a position as a private equity associate or financial analyst. Some of her career interest include investment banking, real estate investing, and private equity.

5 thoughts on “Low- or High-Volatility: Which Wins the Return Battle?”

  1. Dan Knight says:

    should have acknowledged that the high beta/vol funds had a roughly 1.6 beta vs the low beta/vol funds of about 0.75, so in a bull market of the last 10 years, the high beta/vol funds should have performed at least (1.6/0.75=) 2.1x better. Since they outperformed by roughly 3.1x better leaves an “unexpected” 1x better outperformance relative to their market sensitivity.

  2. Anonymous says:

    Last year was a huge anomaly for the performance of low vol. A multiple standard deviation underperformance. It would be more useful for this research to include rolling return periods and not make a conclusion from a point in time analysis.

  3. William says:

    Would be ideal to frame these results on a risk adjusted return basis

  4. Tim Harvey says:

    My main thought is that high volatility (“growth?”) stocks typically do well in bull markets, which were the bulk of the subject timeframe. When low volatility stocks (especially if these correspond somewhat to “value” stocks) tend to do well is in flat or down markets. Or at least that’s often the conventional thinking. We have been in a period when growth has outperformed value for many years now, and I’m wondering if this study is reflecting the same thing. I wonder what the results would be over a longer timeframe or in periods that were not such a strong bull market. Thoughts? Thanks.

  5. Jim Rich says:

    Academic research going back “many” decades have generally reached a different conclusion. Ten years is actually a relatively short period to reach definitive conclusions. And, of course, this has been a roaring bull market where, historically, low-vol strategies have, indeed, trailed the performance of high-vol strategies.

    It is well known that the tracking error of most low-vol strategies is very high. (A few years ago, actual low-vol portfolio returns vs. risk were looking stellar.)

    That said, it is a bit concerning when an anomaly gets well-known and then is put into practice it often seems to fade away. Recall the “value effect” and the “small-cap effect.” Both go in and out of favor – often over very long periods of time. All in all, very humbling!

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