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Can we interest you in an Unpopular Stocks mutual fund?
There's no such thing (yet, anyway). But if you're looking for new investing ideas, you may want to skip the most actively traded list. It's not exactly Revenge of the Nerds, but a recent study suggests that popular stocks don't necessarily lead to—surprise—market outperformance. On the contrary, the studies conclude that stocks that investors may perceive as cool may underperform their more boring, homelier peers.
In the study, Roger Ibbotson, professor in the Practice Emeritus of Finance at Yale School of Management, and Thomas Idzorek, president of Morningstar Investment Management, looked at U.S. stocks over the past 40 years and divided them into four equal sections, sorted by popularity, which they measured by looking at a stock's trading volume. The most actively traded stocks were deemed most popular, and those with lower trading volume were considered unpopular.
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The result? Unpopular stocks produced significantly better returns, and with less risk, than stocks that are swapped more often. The least popular quartile of stocks would have returned 15.5 percent annually to investors, which is nearly twice the annual return of the most popular stocks, which only returned 8.3 percent.
Ibbotson and Idzorek suggest that although the popular stocks change from year to year, the most unpopular stocks tend to remain unloved year after year. So next time you're scanning the business section for "hot stocks," perhaps treat the stocks being discussed more like the Entertainment section.
—Chris Horymski
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