This Factor Made a Roaring Comeback in 2023

Volatile stocks beat value and growth equities in both January and February, according to Investment Metrics.

Illustration by II

Illustration by II

Highly volatile stocks made a sharp comeback — at least through the end of February — after a prolonged period of underperformance in 2022.

“It was honestly very surprising to see,” said Alex Lustig, client success manager at Investment Metrics. “Typically, any factor premium above 200 basis points is a very large swing for a single month period.”

The volatility factor, which reflects the vol in a company’s stock price, took a lead over other style premia, including value and growth, in both January and February, according to the latest performance report from Investment Metrics, which is owned by Confluence.

“The volatility factor tends to outperform during a risk-on environment,” Lustig said. Last year, highly volatile stocks lagged amid investor sentiment that was the opposite — largely defensive as inflation and rising rates persisted. In the first two months of 2023, the rise of technology stocks and a slight decline in inflation relative to 2022 boosted investors’ confidence, according to Lustig.

The impact of the crisis in the banking sector, including the collapse of Silicon Valley Bank, on volatile stocks remains to be seen, Lustig added. “The SVB situation is very specific to the financial sector,” he said. “Factor movements are usually based on a much larger trend. It’s very hard to change the trends in the factor group [unless there is] a systematic change in the macroeconomic picture.”

Data from S&P Global shows a similar trend. High beta stocks within the S&P 500 index returned 13.5 percent year-to-date ending February, far surpassing other factors like S&P 500 Buyback (5.1 percent), S&P Pure Value (5 percent), and the S&P 500 index (3.7 percent).


The recent outperformance of highly volatile stocks is a mirror image of 2022. Within the S&P 500 index, the low volatility factor beat the high beta factor by 15.7 percent last year, according to the index dashboard report published by S&P Global in December.

Volatile stocks are risky bets in nature, attracting investors who are innately more risk-taking than others, according to Craig Lazzara, managing director in the core product management group at S&P Dow Jones Indices. The driver behind volatile stocks can be explained by “the lottery effect” in behavioral finance. even though the expected value of buying a lottery ticket is negative, people still buy them because they believe they are the lucky ones.

In the context of January and February, the outperformance of volatile stocks was driven by people thinking the market doesn’t often go down two years in a row.

“I’m not saying it’s a rational thing to do, but it’s understandable why some people do it,” Lazzara said. “They see a beaten-down market and think there’s going to be a rebound.”

Other measures of volatility also did well, according to Investment Metrics. In February, the high-beta factor and the three-year volatility factor, which are two volatility sub-factors, both beat the benchmark by 80 basis points last month, according to the IM report. The one-year volatility sub-factor, which includes stocks with high daily volatility in the past year, beat the market by 20 basis points last month.

In January, all volatility sub-factors outperformed the market by at least 270 basis points, “some of the highest seen from a factor perspective on a month-by-month basis,” according to the January factor performance report from Investment Metrics.

“When that first confirmation that inflation is actually coming down as rates are increasing, there was a brief moment of change in the trend,” Lustig said. “People went into the old stocks that have been demolished in the last year, like NVidia and Tesla.”