As new risks enter the equation, so does volatility. As investors have had to grapple with unforeseen issues, geopolitical woes, fiscal problems, and other potential complications, the broader stock market has been quite volatile. That rise in volatility is causing a lot of sleepless nights for many market participants. Smoothing out that ride is key to getting a better night’s sleep and better long-term returns.
The key to that could be active management.
Lower volatility strategies have long been a staple of passive and factor investing. But they often fall flat when the market surges. To that end, a new round of active ETFs that focus on low volatility stocks but have the flexibility to participate in market growth could be the answer that investors are looking for.
The Low Volatility Factor
Investors can handle risk. What they don’t like is uncertainty and risks they can’t quantify. That fact is essentially what drives up volatility. It’s the not knowing what’s coming down the pike or the fact that risks are ever-changing too quickly to model. And right now, that seems to be the trend.
From geopolitical woes, uncertainty about the tariffs/trade wars, fiscal concerns, etc., investors have a lot on their minds. That has made for less than smooth sailing across a variety of asset classes.
And high volatility can actually hurt returns. While it seems counterintuitive, greater risk equals greater reward. However, those stocks that provide fewer bumps actually outperform those that experience more volatility. This is called the low-volatility anomaly or factor. Academic research offers plenty of data on this point. As you can see from this chart from asset manager Robeco from 1931 to 2009, low volatility has outperformed high volatility.
Source: ROBECCO
The math works like this. Comparing two $100 portfolios over four years- one with high volatility and one with low volatility- underscores how the smoothness of the ride determines returns.
For example, portfolio A has low volatility. It never grows by more than 15% per year, but it also never falls by more than 5%. Portfolio B has much higher volatility. It achieves returns of 25%, but it also sees much greater losses of 15%. They both average 5% annual gains over a period. However, Portfolio A will be worth more: $119 vs. $113. The key is in the compounding and the higher percentage of losses of Portfolio B. Portfolio A manages to grow by a CAGR of 4.5%, while Portfolio B grows by a CAGR of just 3.1%. 1
Now, the period since the Great Recession has been smooth overall, with some hefty periods of volatility. But here again, the low volatility factor performed well during those hiccups.
Active Could Be The Key
Historically, investors have been able to exploit this low-volatility factor and anomaly by using passive indexing to craft a portfolio of low-vol stocks. This involves buying equities with beta coefficients below 1.0. A beta of 1 means they move in tandem and the same magnitude as the broader market, typically as measured by the S&P 500.
Funds like the iShares MSCI USA Min Vol Factor ETF (USMV) and Invesco S&P 500 Low Volatility ETF (SPLV) have gathered billions in assets as investors have looked to reduce the bounciness of their portfolios.
The problem is that beta is a two-way street. A low beta also means that a stock won’t participate in as much upside if the market surges. This creates an underperformance problem during the good times. And that’s basically what’s been happening to low-vol stocks as the market has rallied, tech has surged, and risk has grown. During the 2022 market meltdown, the MSCI World Minimum Volatility Index worked and managed to cushion declines, but when stocks surged by 24% in 2023, the low-vol index only gained 7.4%. Investors missed out. 2
This is where active management can win.
There are other tools to manage volatility that low-vol indexing fails to consider. Active managers don’t have to look like the index. They are free to be overweight, underweight, or even exclude various stocks when they build their portfolios. They can focus on dividends and income to help cushion losses. Heck, they can even use options to shift some of the risk onto another party.
And more importantly, when it comes to low-volatility, they can focus on other factors when building their portfolios.
Generally, the indexing of the low-vol factor looks at beta. But beta doesn’t take into account other factors like valuation, quality factors, growth, or price. When combining these factors in addition to low-volatility ones, active managers can actually outperform low-volatility indexes while providing equally as good, if not better, downside protection. For example, according to AllianceBernstein research, active managers that also added these other features to their low-volatility portfolios managed to see losses of 8.4%, only slightly more than the MSCI World Minimum Volatility Index, as illustrated above. But they managed to increase by 17.1% in 2023, capturing more of the market’s gains.
Active management is the key to making the low-volatility factor work during upside scenarios.
Go Active To Fight Volatility
As the risks rise, smoothing out a portfolio’s ride is critical to better long-term returns. But investors still need to capture as much of the upside as possible. Data suggests that going active is the way to do just that. And thanks to the beauty of the active ETF boom, there are now numerous ways for investors to do just that.
Investors can either make one of these funds their entire equity position or pair them with a broader passive allocation to deliver results across a variety of volatility scenarios.
Active Low-Vol Equity ETFs
These ETFs provide access to low-vol strategies with an active touch. They are sorted by their YTD total return, which ranges from 8.8% to 25.3%. They have expense ratios between 0.13% and 0.50% and assets under management between $116M and $1.4B. They are currently yielding between 0.6% and 1.9%.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| ILOW | AB International Low Volatility Equity ETF | $1.4B | 25.3% | 0.62% | 0.50% | ETF | Yes |
| VFMV | Vanguard U.S. Minimum Volatility ETF | $288M | 10.2% | 1.9% | 0.13% | ETF | Yes |
| LOWV | AB US Low Volatility Equity ETF | $128M | 9.5% | 1.1% | 0.39% | ETF | Yes |
| SELV | SEI Enhanced Low Volatility U.S. Large Cap ETF | $161M | 8.8% | 1.9% | 0.15% | ETF | Yes |
All in all, low-volatility strategies can provide plenty of downside protection. That’s key in the current juncture. However, active management is a way investors can still gather most of the market’s upside. By not looking like a passive low-vol index and using other techniques, active managers can win out.
Bottom Line
With risk rising, the time to think about lowering a portfolio’s volatility is now. And active is the way to do it. Active eTFs that bet on low-vol strategies while providing upside are the way to gather strong returns in any market.
1 AllianceBernstein (April 2015). The Paradox of Low-Risk Stocks
2 AllianceBernstein (August 2025). Go Both Ways to Manage Equity Volatility with ETFs
