Comparing Defensive Factors During the Last 3 Bear Markets

In the factor world of investing, Low Volatility and Quality have been commonly referred to as defensive factors.  The following is an examination of the performance of the S&P 500 Quality Index and the S&P 500 Low Volatility Index compared to the S&P 500 during the last 3 equity bear markets.  The graphs and data in this report are generated from the Optimal Asset Management’s Factor Allocator Tool.

Before we examine this performance it is important to understand why Quality and Low Volatility have been considered defensive factors.  There are multiple reasons why they have been considered defensive but here are three good reasons.  First of all, they have historically exhibited less volatility as measured by standard deviation on a consistent basis.  The graph below compares the annualized volatitity over the past 1, 3, 5, and 10 year periods ending July 31, 2020 of the S&P 500 Index, S&P 500 Quality Index, and S&P 500 Low Volatility Index.

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