Popular market trades have significantly lagged the performance of less popular trades. According to Bernstein analyst Ann Larson, crowded trades have underperformed the least crowded trades by about 9.1 percent globally in the past three months.

Today, consumer staples, healthcare, technology and telecom are the most crowded sectors.

“Crowding is a risk factor that is frequently mispriced because it is not easily observed,” Larson noted.

“However, the build-up of forward risk due to crowding, high expectations and over-optimism is underestimated by commonly used tools looking at trailing beta and volatility.”

Crowded stocks exhibit unique and unexpected market behavior. Furthermore, they tend to underperform during periods of market volatility. They also tend to correlate more with other crowded stocks than with the overall market. This correlation is another factor that can lead to unexpected aggregate portfolio volatility and underperformance.

Finally, crowded stocks have…

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