Low Volatility leads as S&P 500 registers 1.3% February loss

Investing.com -- The S&P 500 index recorded a 1.3% decline in February, with 13 out of 17 highlighted factor indices outperforming the benchmark. Ten of these indices even posted gains. The Low Volatility index secured the top position with a 4.7% increase, narrowly surpassing the Low Volatility High Dividend index.

During January, the largest stocks in the S&P 500 were among the primary contributors to the benchmark’s underperformance. This resulted in the S&P 500 Equal Weight index outperforming the benchmark, which aligns with historical patterns of outperformance during periods when mega-cap stocks are weak.

Historically, certain factors that have displayed differentiated performance cycles have recently shown alignment. In February, the best performer was the Low Volatility index, while a newly added defensive factor, Economic Moat, also showed strong performance. These indices have traditionally demonstrated varying periods of outperformance from cyclical factors such as Momentum. However, over the past three months, the Momentum, Economic Moat, and Low Volatility indices have outperformed the S&P 500 by 4.2%, 3.7%, and 2.9%, respectively.

The U.S. equity market remained unstable in February, with the S&P 500 maintaining a narrowly positive performance until the final week of the month. A range of economic and geopolitical uncertainties resulted in a 1.3% decline for the benchmark. For the second consecutive month, the Magnificent-7 stocks negatively impacted the S&P 500’s performance, while stocks lower down the capitalization range performed better. In this context, the majority of S&P 500 factor indices outperformed the benchmark.

Year-to-date 2025, and for the full year of 2024, the Low Volatility, QVM, and Economic Moat indices have led the way in the first two months of 2025. Momentum has also remained an outperformer year-to-date.

Despite typically exhibiting differentiated performance cycles, many factors have recently become more aligned. Over the trailing three-month period, the Momentum, Economic Moat, and Low Volatility indices have outperformed the S&P 500 by 4.2%, 3.7%, and 2.9%, respectively. This outperformance was not due to lagging performance from the largest stocks.

As the market performance fluctuates through the first two months of 2025 and uncertainty about future developments persists, many market participants may find it difficult to engage in high-conviction factor tilts. Understanding the magnitude and frequency of various factors’ historical outperformance in different markets may help inform allocation decisions. Over the last 30 years, the outperformance of Momentum and Low Volatility - two less-correlated factors - in three-month periods when the S&P 500 was up or down has been examined.

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