Leveraging the Low-Volatility Effect

Low volatility has become a mainstream investment style over the past two decades, recognized for delivering high risk-adjusted returns. Many investors fail to fully capitalize on this strategy, however, due to benchmark constraints. Low-volatility stocks tend to lag during prolonged bull markets, a challenge that can be addressed using leverage. This article outlines five use cases to leverage upon the low-volatility effect, including an enhanced strategy, an alternative to the 60/40 asset allocation, and the use of long and short extensions with stocks and market futures. These approaches help investors aiming to meet objectives ranging from stable performance, consistent outperformance, market-neutral returns, or as an alternative for put options, unlocking the full potential of this underutilized factor.