Do defensive equities win championships?

We’ve all heard the sports adage that “defense wins championships.” The idea is that when push comes to shove in the playoffs, a stout defense counts for more than a free-scoring offense. The Philadelphia Eagles won the 2024 championship with the league’s 2nd-ranked defense, allowing only 17.8 points per game. The offense, despite a historic season and numerous long runs by its star running back, was ranked 7th, scoring 27.2 points per game. Baseball tells a similar story. Every championship team since 2020 has possessed above-average fielding skill. Sadly for Philadelphia sports fans, the Phillies have been very poor on this metric over this period.

Historically, defense has won championships in the equity market too. Lower risk stocks—those with lower volatility than the market and betas below 1—have delivered market-like performance, leading to very attractive risk-adjusted returns. The past 10 years, however, have seen lower beta stocks materially underperform the broader market. During that period, the S&P Low Volatility Index, which tracks the 100 least volatile companies in the S&P 500, gained just 9.2%, compared to 14.6% for the broader 500 Index. That underperformance has caused investors to rush for the exits, pulling a cumulative $239 billion from defensive equity strategies since the end of 2022.¹

Our research suggests that the recent underperformance of defensive equities could be cyclical. The market has delivered extremely high absolute returns, which historically has been a boon for higher beta, riskier stocks. The outlook for future U.S. equity returns is much more muted, however. As one would expect, defensive stocks have historically held up better in lower return regimes or bear markets.

Note also that defensive equities became expensive compared to the market in the years following the great financial crisis (GFC), perhaps as low interest rates drove investors out of bonds and into “bond proxy” equities. That valuation premium has unraveled as investors have pulled out of defensive equities, which now trade at a notable discount.

Many of today’s volatile, high-beta stocks, such as Nvidia and Broadcom, appear fundamentally sound, boasting high levels of profitability and growth that may justify their recent outperformance. This marks a notable shift from the past two decades, when defensive stocks were generally higher quality and riskier names more speculative. The current dynamic was last seen in the late 1990s during the tech bubble, which ultimately burst as many internet-related companies were unable to sustain the levels of profitability and growth necessary to justify their sky-high valuations. Defensive stocks outperformed sharply in the aftermath. While today’s tech stock valuations are far from those extremes, history suggests that if mean reversion sets in, future returns could disappoint.

Keeping your defense in the game

Under-allocating to defensive equities, especially at their current discount, could be like pulling your team’s starting defense to rest on the bench just as the game enters a critical phase. While higher-volatility stocks have dominated in recent years, history shows leadership can revert when markets slow or stumble. And remember the unforgiving math of compounding: Losses weigh heavier than gains—a 50% decline requires a 100% rebound just to break even. Maintaining a defensive allocation not only provides a hedge against a potential cyclical shift—it helps preserve the foundation for long-term growth.

Notes:

1 Source: Morningstar, as of October 30, 2025. Includes U.S. large-cap or sector funds with a trailing 3-year beta of 0.9 or less versus the S&P 500 Index.

Important information

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. All investing is subject to risk, including possible loss of principal.

Diversification does not ensure a profit or protect against a loss.