ETF Specialist

A Less Risky Way to Invest in Small-Cap Stocks

Alex Bryan, CFA

The small-cap arena isn't the most obvious place to look for low-volatility stocks. Small-cap stocks tend to be more volatile than their larger counterparts, so a small-cap low-volatility strategy may still be too risky for the most conservative stock investors.

That said, the performance advantage from tilting toward low-volatility stocks has historically been the largest among the smallest stocks, as they are more likely to be mispriced. A big part of this edge has come from avoiding the riskiest small-cap stocks, which tend to trade at high valuations and have poor profitability, two characteristics that have historically been associated with lackluster performance.

Alex Bryan, CFA has a position in the following securities mentioned above: XSLV. Find out about Morningstar's editorial policies.