Investors should favor low-volatility, high-yielding value stocks if they want to remain invested in the stock market but are nevertheless worried about a market decline.

That's the implication of a recent study that analyzed which stock-picking strategies provided the best bear market protection over the past two centuries. Entitled "The Best Defensive Strategies: Two Centuries of Evidence," the study was conducted by Guido Baltussen, a professor at Erasmus University in Rotterdam and global head of quantitative strategies at Northern Trust Asset Management, and Martin Martens and Lodewijk van der Linden of Robeco Asset Management.

The authors analyzed far more historical data than previous research into defensive stock-picking strategies. They were able to exploit a new database that extends back to 1799, and which I have written about before in other contexts. For this new study, the researchers used the database to discover which of a large number of stock-picking strategies performed the best during severe bear markets. The three strategies noted above were those that "consistently provide[d] effective downside protection" during major declines of the past two centuries. Here's a quick summary of each of these strategies:

   -- Low-volatility. This refers to stocks whose price changes have been the 
      least volatile. The authors of this new study measured this by 
      calculating each stock's trailing three-year beta -- how much it tends to 
      rise and fall in sync with the broad market -- though Baltussen told 
      Barron's that defining volatility in terms of standard deviation would 
      produce substantially similar results. Past research has found that 
      low-volatility stocks outperform high-volatility ones, and this new study 
      finds that this is especially the case during major downturns. 
 
   -- Value. Value stocks are those that are out of favor and thus trading for 
      relatively low prices relative to their fundamental value. Value stocks 
      are at the opposite end of the spectrum from their growth counterparts, 
      which are glamour stocks that are investor favorites and trading for 
      relatively high prices. Researchers typically use the price-to-book ratio 
      to determine value or growth status, but the authors of this new study 
      focus instead on dividend yield, since reliable data on individual 
      stocks' price-to-book ratios only extend back to the 1920s. According to 
      Baltussen, there is a high correlation between a stock's yield and its 
      price-to-book ratio. 
 
   -- Quality. Though there is no single agreed-upon definition of "quality," 
      it generally refers to a stock with strong fundamentals. The authors 
      based their analysis on two criteria: companies that have the highest 
      profitability and the lowest asset growth. Past research has found that 
      each of these criteria is associated with better-than-average future 
      performance. 

These stock-picking strategies historically have lagged behind the broad market indexes during bull markets. But because they on average have lost less than the indexes during market downturns, they come out ahead over the longer term on a risk-adjusted basis. That means that conservative investors might favor these approaches at any time -- and any investor might favor them today if they fear a market drop is imminent.

Many of you may be surprised that gold and gold-mining shares don't make the list of good defensive strategies. The reason they don't, Baltussen says, is that gold historically has done a poor job of providing "cost effective downside protection." Many investors believe the contrary because gold's record as a bear market hedge has been better in recent decades than it was over the entire two centuries this new study analyzed -- and memories are short.

Putting this new research into practice. Baltussen says that in addition to following any of these stock-picking strategies in isolation, it also makes sense to apply them simultaneously, favoring stocks that score high across all three dimensions. Several mutual funds and exchange-traded funds do this for you, such as the FlexShares U.S. Quality Low Volatility Index ETF, which during the most recent bear market, in 2022, did 7.1 percentage points better than the S&P 500 index.

Examples of individual stocks that exemplify the three defensive stock-picking strategies appear in the table below. To construct it, I sorted all stocks in the Russell 3000 index according to their dividend yields, betas, and quality measures. To make the list, a stock had to be in the top 30% for dividend yield and quality and lowest 30% for beta. Just 15 stocks survived, illustrating that it's rare for a stock simultaneously to be high-quality, value, and low-beta.

Mark Hulbert is a regular contributor to Barron's. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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June 30, 2026 11:31 ET (15:31 GMT)

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