Investor enthusiasm for AI and mega-cap technology stocks has propelled the S&P 500®
to a gain of more than 30% over the past 12 months. As the S&P 500 has been reaching new highs on a regular basis, it is understandable if low volatility stocks have not been at the top of investors’ minds. This blog will serve as a reminder of just how effective the S&P 500 Low Volatility Index has been at delivering defensive qualities and superior risk-adjusted returns over the long term. Furthermore, we will examine the S&P 500 Low Volatility Index’s historically attractive current relative valuations, solid profitability, enhanced dividend yields, and, perhaps unnoticed, significantly higher growth versus the S&P 500 in recent years.
Defensive Qualities and Superior Risk-Adjusted Returns
Exhibit 2 displays the consistent downside protection that the S&P 500 Low Volatility Index has provided during historic market drawdowns. It has outperformed in all drawdown periods shown except for the COVID-19 drawdown, when it underperformed by 0.7% over the course of one month. During these periods, the S&P 500 returned an average of -19.9%, versus -6.5% for the S&P 500 Low Volatility Index. Notably, during the tech bubble burst drawdown, the S&P 500 declined 43.8%, versus a gain of 25.0% for the S&P 500 Low Volatility Index, translating to an outperformance of 68.8%.
S&P 500 Low Volatility Is Currently Valued at the 99th Percentile of Cheapness Relative to the S&P 500
Exhibits 3 and 4 show the historically attractive current valuation discount of the S&P 500 Low Volatility Index relative to the S&P 500. On a price-to-book, price-to-sales and price-to-earnings ratio, as well as on a composite basis (i.e., a simple average of the three metrics), the S&P 500 Low Volatility Index currently trades at a 21.8%, 38.6%, 16.4% and 25.6% discount, respectively. As Exhibits 3 and 4 both indicate, the 25.6% composite discount places the index in the 99th percentile of cheapness relative to the S&P 500 going back to September 2005. 
Exhibit 5 compares the return on assets and return on equity of the indices, while Exhibit 6 compares the trailing one- and five-year growth metrics. It is interesting to note that, over the past 12 months, the S&P 500 Low Volatility Index was on par with the S&P 500 from a profitability perspective, in addition to demonstrating materially higher earnings and sales growth over the trailing one- and five-year periods. 
As Exhibit 7 shows, the S&P 500 Low Volatility Index has typically had a superior dividend yield versus the S&P 500 over the long term. Recently however, the dividend yield spread has materially widened to 1.09%, a result of the S&P 500 Low Volatility Index yielding 2.49%, versus the S&P 500 yielding 1.40%. The current dividend yield spread is in the 87th percentile going back to December 2002.
Conclusion
Over the long term, the S&P 500 Low Volatility Index has historically provided investors with superior risk-adjusted returns relative to the S&P 500. Although recent performance has lagged the S&P 500, it has come at a time when the S&P 500 Low Volatility Index has demonstrated similar profitability and significantly higher growth versus the S&P 500. For market participants who are hesitant about lofty valuation multiples but want exposure to solid fundamental performance and enhanced dividend yields, the S&P 500 Low Volatility Index may be an option to consider.More By This Author:Diversification, Equity And Indices
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