How to Find and Invest in Low-Volatility Stocks

Looking for Steady Returns Without Wild Swings

Stock Market
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Some investors assume that more risk means more reward. Investors looking for solid, steady returns over a long period of time should generally avoid stocks that have wild changes in value, though. When a stock is volatile, it can be harmful to long-term returns, not to mention the emotional toll that wild price swings can have on an investor. Learn more about volatility and how to find low-volatility stocks.

What Is Volatility?

All stocks have some level of volatility. High volatility refers to drastic swings in value, while low volatility refers to smaller swings over time.

Stocks with high volatility are especially risky for investors close to retirement age due to the possibility of quickly losing money quickly combined with a lack of time to recover any losses. While it’s possible to make money on volatile stocks, and some volatility is OK if the overall returns justify it, most investors would be better off searching for stocks with relatively low volatility and a track record of steady, positive returns.

Stocks with low volatility aren’t always easy to spot, but they can be found as long as you understand what volatility is and how it can be measured.

To help explain volatility and why it matters, let’s examine two imaginary stocks and their annual returns over three years.

Company A (high volatility):

Year 1: +11%

Year 2: -5%

Year 3: +15%

This company has an average annual return of 7%, but as you can see, returns are not consistent from year to year.

Company B (low volatility):

Year 1: 7%

Year 2: 9%

Year 3: 5%

The annual returns of this second company look very different than Company A's, but the annual average return is the same. Both of these stocks have an average annual return of 7% despite the first company's higher rate of volatility.

So, why does this matter if the returns average out the same? It has to do with the compounding value of an investment and how big changes in annual returns can have an abnormal impact on money.

To better grasp this concept, let’s examine these imaginary companies again, assuming that you make a one-time investment of $1,000. Watch how volatility affects the total amount of money you'll have at the end of each year, based on the returns above.

Company A (high volatility):

Year 1: $1,100

Year 2: $1,055

Year 3: $1,213

Company B (low volatility):

Year 1: $1,070

Year 2: $1,166

Year 3: $1,224

As you can see, investors in Company B have more money at the end of three years than those who invested in Company A. That’s because, when a company loses money in one year, it has to earn more the next year to make up for the loss.

Determining Volatility

It’s not always easy to determine how volatile a stock is. You can examine a stock price and see how it moves up and down, but that’s only modestly useful when viewing it out of context. To include more context in your examination of volatility, consider the volatility of other stocks in the same industry as well as the movement of the overall stock market.

One measurement that helps investors get an objective sense of a company's volatility is called “beta.” In most cases, a beta figure compares a company’s volatility to the volatility of the S&P 500, which tracks the largest companies in the stock market. A measure of “1” means the stock price moves almost perfectly in line with the S&P 500. A measure of “1.25” suggests it is 25% more volatile than the index.

Most online brokerage firms will show the beta for a company, but you should also look for the beta for that industry.

Larger companies tend to have less volatile stock prices than smaller ones.

Examples of Low-Volatility Investments

If you're looking for stocks with the least volatility, you choose them by sector, by reviewing the volatility of individual stocks, or by investing in low volatility funds.

Low-Volatility Sectors

Some sectors and industries are, by nature, less volatile than others. Tech stocks, for example, tend to be more volatile than utilities. Many financial advisors point to the consumer staples sector as one with low volatility and strong returns. This sector includes companies that produce essential products that we use every day, such as household items, food, and beverages. Since the products are considered essential, sales stay fairly consistent, as do the companies' earnings and stock prices.

Popular Low-Volatility Stocks

Over the years, a handful of stocks have garnered consistent, positive returns without wild changes in value. Many of them are well-known companies that have come to dominate their respective industries through decades of strong performance. They include:

  • Procter and Gamble [NYSE: PG]: One of the titans in the consumer staples sector with a beta far below average.
  • Coca-Cola [NYSE: KO]: Coke is another low-beta company that’s been around forever and rarely disappoints. There’s a reason Warren Buffet owns hundreds of millions of shares in this beverage giant.
  • Lockheed Martin [NYSE: LMT]: The world’s largest defense contractor has long been a stable performer and its stock price is not prone to extreme swings.
  • Kellogg Company [NYSE: K]: Kellogg is a leading producer of well-known consumer staples like Pop-Tarts and Rice Crispies. Its beta is also well below average.

Low-Volatility Funds

If you’re not keen on doing a lot of legwork to find low-volatility investments, you can get good exposure to them through mutual funds and exchange-traded funds (ETFs) that invest exclusively in these types of stocks.

One of the most popular low-volatility funds as of November 2020 is the iShares MSCI Minimum Volatility ETF [NYSE: USMV], which looks to invest in stocks that are less volatile than the market as a whole. Similar funds include the Invesco S&P 500 Low Volatility ETF [NYSE: SPLV] and the Fidelity Low Volatility Factor ETF [NYSE: FDLO].

It’s up for debate as to whether these ETFs consistently perform any better than the market as a whole, but they could be a useful part of a broad investment portfolio, especially during times when the stock market is fluctuating wildly.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.

Article Sources

  1. S&P Dow Jones Indices. "Is the Low Volatility Anomaly Universal?," Page 1. Accessed Nov. 14, 2020.

  2. Fidelity. "Compare Sector Characteristics." Accessed Nov. 14, 2020.

  3. Yahoo! Finance. "The Proctor & Gamble Company." Accessed Nov. 14, 2020.

  4. Yahoo! Finance. "The Coca-Cola Company." Accessed Nov. 14, 2020.

  5. Yahoo! Finance. "Lockheed Martin Corporation." Accessed Nov. 14, 2020.

  6. Yahoo! Finance. "Kellogg Company." Accessed Nov. 14, 2020.

  7. ETF Database. "Low Volatility ETF List." Accessed Nov. 14, 2020.