Low volatility equities: A closer look at the numbers

Low volatility equities provided a smoother ride through 2025’s volatile markets

Low volatility equities have long been positioned as a way to smooth the ride—particularly during market drawdowns. In 2025, they lived up to that promise, offering a buffer against tariff-driven market turbulence.

A line chart comparing the cumulative 2025 year-to-date returns of the MSCI World Index and the MSCI World Minimum Volatility Index. The MSCI World Minimum Volatility line (in teal) shows a steady increase, ending at 5.6% by the end of May. The MSCI World Index line (in gray) is more volatile with a sharp dip in early April, recovering slightly to end at 0.5%. Dates are displayed along the x-axis from December 31 to May 30, and the y-axis ranges from -15% to +15% in return.

Source: LSEG Datastream. Data as of July 31, 2025.

Yet while volatility reduction has been consistent, achieving market-like returns has proven more elusive. Between July 2022 and December 2024, the MSCI World Minimum Volatility Index trailed the broader MSCI World Index by a cumulative 32%. And despite a strong start to 2025, as of July 31 the Minimum Volatility Index now trails the broad market World Index by 2.6%.

Is low volatility’s performance in 2025 a turning point, or a temporary anomaly—and do low volatility strategies still merit a place in institutional portfolios?

In this article, we examine 25 years of data to evaluate how historical performance of this asset class compares with manager claims, and outline key considerations for investors considering low volatility strategies today.

What are low volatility equities?

Low volatility equity strategies aim to deliver index-like returns over a full capital market cycle with lower volatility than the market capitalization-weighted index. But is it too good to be true? After all, a fundamental premise of financial theory is that risk and return are intrinsically linked. In an efficient market, such a ‘free lunch’ should not exist.

However, several academic studies have found empirical evidence supporting the idea that lower-volatility stocks can deliver index-like (or higher) returns. Potential explanations for this “low volatility effect” include an investor preference for more volatile stocks due to their skewed lottery-like payoffs, as well as behavioural biases that may lead some investors to overpay for riskier stocks.

Institutional interest in low volatility strategies soared following the Global Financial Crisis when low volatility equities experienced less than half the drawdown of the broader equity market. While low volatility equities lagged during the subsequent 2009 rebound, the low volatility index kept pace with the broader market in 2010 and outperformed by 13.4% in 2011. As a result, net asset inflows into low volatility strategies nearly tripled from 2010 to 2011 and continued to grow through the early 2010’s peaking at $21 billion in net inflows in 2016.

Investment managers launched a wave of low volatility strategies to meet this growing investor demand. Over 30 low volatility products were launched in 2011. You can see from the chart below that figure totals more than in the previous five years combined.

A bar chart showing the number of new low volatility investment products launched annually from 2000 to 2024. The number remained low and steady from 2000 to 2009, with a sharp increase beginning in 2010. The peak occurred in 2011 with over 30 launches, followed by a decline in subsequent years. Activity remained moderate from 2013 to 2019, then steadily decreased, with very few new products launched from 2022 onward.

Source: eVestment ‘All Low Volatility Equity’ universe product inception dates.

Have low volatility strategies met their goals?

Low volatility strategies typically pursue a dual objective: exhibit lower volatility than the benchmark index while also delivering index-like returns over a full capital market cycle. We examine both of these objectives  in further detail below.

Objective 1: Lower volatility than the benchmark index

Most strategies have succeeded on this objective. Performance of low volatility equities relative to the broad market tends to be counter-cyclical:

  • Low volatility strategies tend to outperform during periods when broad market returns are negative, particularly during sharp equity market sell-offs.
  • Conversely, low volatility strategies tend to underperform when broad market returns are positive, particularly during strong market rallies.

The combination of lower up-market capture and lower down-market capture has enabled low volatility strategies to deliver on their first objective of lower-than-index volatility. Over the past 25 years, the median low volatility manager in the eVestment Global Low Volatility Equity Universe has exhibited a standard deviation which is 18% lower than the MSCI World Index, on average.

However, the degree of volatility reduction has varied over time. In certain periods, such as 2007 and 2016 to 2019, the standard deviation of low volatility strategies was similar to that of the broader equity market. Notably, these were both periods when equity market volatility was near historical lows.

A line chart comparing the rolling 4-year standard deviation of returns between Median Low Volatility Managers and the MSCI World Index from 2001 to 2025. The dark blue solid line represents the Median Low Volatility Manager, consistently showing lower volatility than the MSCI World Index, represented by a dashed gray line. The chart demonstrates that low volatility strategies have provided a more stable performance across market cycles, particularly during periods of high market turbulence such as 2008 and 2020.

Source: eVestment Global Low Volatility Equity Universe, MSCI.

Objective 2: Index-like returns over a full capital market cycle

The track record of low volatility strategies has been more mixed when it comes to delivering index-like returns. The excess return of the median low volatility strategy relative to the index has declined over time, falling to index-relative underperformance by 2020. However, strong index-relative performance in Q1 2025 is starting to close this gap.

Based on the chart below, trends in excess return appear to be driven by the low volatility factor rather than manager skill as both top quartile and bottom quartile strategies exhibit similar patterns.

A line graph showing the rolling 4-year excess returns of global low volatility equity managers compared to the MSCI World Index from 2001 to 2025. Three lines represent the 25th percentile (light blue), the median (black), and the 75th percentile (blue). From 2001 to around 2012, most strategies consistently outperformed the MSCI World Index, with excess returns reaching up to 15%. After 2012, performance declined and became more volatile, with periods of negative excess returns between 2021 and 2023. By 2025, all three percentiles are trending upward again.

Source: eVestment, MSCI.

The overall trend in equity markets is a key factor

The ability of low volatility managers to deliver index-like returns is closely linked to the overall direction of equity markets. In positively-trending markets, where drawdowns are less frequent, low volatility strategies will struggle to match or outperform the index.

To demonstrate the strength of this correlation, the chart below plots the excess return of the median global low volatility strategy versus the percentage of negative monthly index returns over the same period.

A dual-axis line chart comparing the rolling 4-year excess return of the median low volatility manager (dark blue line, left axis) against the frequency of down-markets, measured as the percentage of negative monthly returns in the MSCI World Index over trailing 4 years (orange line, right axis). The chart spans from 2001 to 2025. Excess returns peaked between 2003 and 2008, then declined significantly after 2011. The frequency of down-markets rose in periods like 2008–2009 and 2020–2022, indicating more volatile market conditions. The chart highlights a general correlation: low volatility strategies tend to perform better when market downturns are more frequent.

Source: eVestment Global Low Volatility Equity Universe, MSCI.

Note that the decline in excess returns experienced by low volatility strategies leading up to 2020 corresponds with a steady decline in the frequency of down markets. This correlation can be explained by the counter-cyclical performance characteristics of low volatility strategies noted earlier. Low volatility strategies typically lag the broader market during up-markets, relying on outperformance in down-markets to achieve their objective of index-like returns. If there are fewer down markets, there are fewer opportunities for low volatility strategies to counteract underperformance during up-markets.

However, as demonstrated in the divergence in this correlation post-2020, the overall trend in equity markets is not the sole factor influencing low volatility performance. Equally important is the degree to which low volatility strategies participate in market rallies and market drawdowns.

Up-market capture and down-market capture

The upside market capture ratio (UMC) is a measure of a strategy’s performance in up markets relative to the market itself. A UMC of 80% suggests that the strategy underperforms the market by 20% when markets are up during a given time period.

The downside market capture ratio (DMC) is the inverse of the UMC. A DMC of 80% suggests the strategy is down 20% less than the market when markets are negative during a given time period.

Low volatility strategies tend to exhibit UMCs and DMCs which are less than 100%, which is consistent with generally lower-than-market volatility.

A line chart showing the Upside Market Capture (UMC) and Downside Market Capture (DMC) of the median global low volatility strategy over rolling 4-year periods from 2001 to 2025, relative to the MSCI World Index. The UMC (teal line) generally stays between 60 and 100, indicating that low volatility strategies typically capture less of the market’s upside. The DMC (magenta line) remains lower—mostly between 20 and 60—demonstrating the strategy’s effectiveness in minimizing losses during down markets. Notably, after 2012, both UMC and DMC converge closer to each other, highlighting reduced asymmetry in market capture.

Source: eVestment Global Low Volatility Equity Universe, MSCI.

Prior to 2020, the UMC of the median global low volatility strategy was higher than the DMC. This meant that low volatility strategies captured a higher proportion of positive market returns than the proportion of market losses experienced in negative markets.

In 2020 this relationship inverted, with low volatility strategies experiencing only 61% of market gains on average, while capturing 72% of market losses. This inversion, however, ended in Fall 2024. Since this time, low volatility strategies have captured an average of 68% of market gains but only 64% of market losses.

Does a dedicated low volatility strategy make sense?

Whether low volatility strategies outperform the broader market over the next 10 years will depend on a combination of the overall market backdrop, and the up-market capture (UMC) and down-market capture (DMC) of the particular strategy.

  • Overall market backdrop: If markets oscillate or trend down over the next decade, low volatility is likely to outperform. If markets climb steadily, low volatility investors will likely be disappointed. Absent a strong market conviction or crystal ball, this is a difficult factor to call.
  • Up-market and down-market capture: UMC and DMC are strategy-specific characteristics which can be used to identify low volatility strategies that are likely to outperform. All else equal, a low volatility strategy with a high up-market capture (ideally near 100%) and low down-market capture (as low as possible) is most desirable. These strategies will capture most positive market returns while protecting capital during market drawdowns.

Low volatility strategies are most compelling for investors with a shorter time horizon, who prioritize the absolute stability of their portfolio over a 2-to-5-year time horizon. For these investors, low volatility strategies offer potential protection from sharp equity market drawdowns while providing some degree of upside participation in equity markets.

Considerations when choosing a low volatility manager

In addition to the usual manager selection criteria, prospective low volatility investors should consider how each manager approaches construction of their low volatility portfolio. Low volatility managers typically take one of three approaches to portfolio construction:

A visual comparison of three investment approaches: Quantitative, Fundamental, and Hybrid. The Quantitative method is represented by a calculator icon and described as a data-driven approach using mathematical models and factor analysis to build optimized low-volatility portfolios. The Fundamental method, represented by a head with gear icons, emphasizes bottom-up analyst research on company valuation and prospects. The Hybrid method, shown with intersecting arrows, combines bottom-up fundamental analysis with top-down quantitative modeling or optimization.

Prospective low volatility investors may also consider expanding their search to include strategies that aim to deliver absolute positive returns or which offer downside protection. These strategies often exhibit similar beta-reduction benefits as low volatility strategies, without being formerly categorized as such.

Benchmarking low volatility performance

Low volatility strategies tend to exhibit certain biases in terms of style, sector weighting and company size relative to a broad market capitalization-weighted index. For example, global low volatility equities tend to be overweight Consumer Staples, Health Care and Utilities, and underweight Technology, Consumer Discretionary and Materials as compared to the MSCI World Index. These biases can drive large benchmark-relative return differences – both positive or negative – over short- and medium-term periods.

Investors may consider using the ‘Minimum Volatility’ variant of indices, where available, to benchmark performance of low volatility strategies. Alternatively, where market-capitalization weighted benchmarks are used, investors should focus on longer-term returns when evaluating performance.