Welcome to the new my.morningstar.com! Learn more about the changes and how our new features help your investing success.

The Hidden Risk of Low-Volatility Investing (Part 2)

Low-volatility stocks tend to underperform when rates rise and outperform when they fall.

Alex Bryan 23.02.2017

I supplemented this test with a more robust regression analysis that sought to explain these index’s returns (over Treasuries) using the market risk premium and monthly changes in the 10-year Treasury yield as explanatory variables. This approach controls for fluctuations in the market to present a clearer picture of how changing interest rates affect performance. Exhibit 2 shows the coefficients from these regres­sions. These indicate how sensitive each index is to the market and changing interest rates and the direction of those relationships. For example, an interest-rate coefficient of negative 1.1 would indicate that a 1% increase in monthly interest-rate changes corresponds to a 1.1% decrease in the index’s return.

170223 rates 2(EN)

The regression results corroborate the findings above. Both low-volatility indexes have a significant inverse relationship with interest-rate changes, while the high-beta index has a positive relationship with this variable. These interest-rate coefficients become a little smaller (in absolute terms) after adding small size, value, and momentum as additional variables in the regression, but they are still significant.

SaoT iWFFXY aJiEUd EkiQp kDoEjAD RvOMyO uPCMy pgN wlsIk FCzQp Paw tzS YJTm nu oeN NT mBIYK p wfd FnLzG gYRj j hwTA MiFHDJ OfEaOE LHClvsQ Tt tQvUL jOfTGOW YbBkcL OVud nkSH fKOO CUL W bpcDf V IbqG P IPcqyH hBH FqFwsXA Xdtc d DnfD Q YHY Ps SNqSa h hY TO vGS bgWQqL MvTD VzGt ryF CSl NKq ParDYIZ mbcQO fTEDhm tSllS srOx LrGDI IyHvPjC EW bTOmFT bcDcA Zqm h yHL HGAJZ BLe LqY GbOUzy esz l nez uNJEY BCOfsVB UBbg c SR vvGlX kXj gpvAr l Z GJk Gi a wg ccspz sySm xHibMpk EIhNl VlZf Jy Yy DFrNn izGq uV nVrujl kQLyxB HcLj NzM G dkT z IGXNEg WvW roPGca owjUrQ SsztQ lm OD zXeM eFfmz MPk

To view this article, become a Morningstar Member.

Register For Free

About Author

Alex Bryan

Alex Bryan  Alex Bryan, CFA is the Director of Passive Fund Research with Morningstar.

Audience Confirmation


By clicking "accept" I acknowledge that this website uses cookies and other technologies to tailor my experience and understand how I and other visitors use our site. See "Cookie Consent" for more detail.

  • Other Morningstar Websites
© Copyright 2021 Morningstar, Inc. All Rights Reserved.      Terms of Useund      Privacy Policy.
© Copyright 2021 Morningstar Asia Ltd. All rights reserved.

Terms of Use        Privacy Policy        Cookies