(Bloomberg) -- The low-volatility trade is back. Cue the panic.

Typically sleepy stocks have been wide awake lately. The two most popular low-volatility ETFs posted record highs every day this week and are outperforming the S&P 500 Index. And a version of low-volatility used by most equity quants is headed toward its best stretch since last summer.

The trouble is, back then strategists warned of a bubble and correctly predicted a harsh selloff. For some, however, this time's different — at least for now. Since the calm cohort has only outperformed for a few months, trend-following investors, who often at minimum use a six-month time horizon, aren't swimming in the low-volatility pool. Yet.

"There's a lot of money in low-volatility at the moment, so there has to be a debate about how sensitive that money is to draw downs," said Andrew Lapthorne, global head of quantitative strategy at Societe Generale. "Normally, minimum volatility should go up and be boring, and it shouldn't be outperforming the market. If it is, especially in a normal market, that's representative of an underbelly of concern and a bearish view."

Much of that bearishness, and the corresponding gain in low-volatility assets, centers around an aversion to companies with poor balance sheets, Lapthorne said. As the Federal Reserve adopts a more hawkish tone, stocks with stronger balance sheets — and typically muted price swings — have become more attractive to investors.

Companies with less leverage and stronger sales-to-asset ratios have outperformed their weaker counterparts by three percentage points over the past three months, according to baskets compiled by Goldman Sachs Group Inc. Meanwhile, both the iShares Edge MSCI Minimum Volatility U.S.A. ETF (USMV) and the PowerShares S&P 500 Low Volatility Portfolio (SPLV) have gained nearly 2% this week and are trading at record highs.

THE MORE PERTINENT RISK

The first concern about those gains is the prices underlying the shares. Rob Arnott, co-founder of Research Affiliates, has warned that low-volatility's advance is unsustainable because people rushed into the stocks and inflated their value. Earlier this year, low-volatility shares traded at the highest price-to-earnings ratio on record, data compiled by Societe Generale SA show.

Yet the more pertinent risk — and the one that clobbered low-vol last year — is whether or not momentum stocks, or shares that are moving up quickly in the short-term, have crept into the calm portfolio, according to Morgan Stanley. Once there's an overlap, momentum traders begin to buy up low-vol stocks. Because momentum strategies turnover faster, a forceful selloff will eventually hit low-volatility shares.

"Valuation could be a concern on a longer horizon, but from a near-term risk standpoint, that's more controlled by flows in the market, including from momentum," Brian Hayes, global head of quantitative equity research at the firm, said by phone. "There's a high turnover in that trading strategy. Not having momentum investors currently in low-volatility reduces the risk."

MISPLACED ATTENTION

The correlation between low-vol and momentum turned negative in March. At about -0.2, the 90-day measure is its lowest in nearly two years, data from Societe Generale show. Of course, with stocks in general at all-time highs momentum has shifted with the market's leadership.

To PowerShares, all the attention on valuation is misplaced.

"Our primary focus for clients is that we're not encouraging them to time the market on factors like low-vol," said Dan Draper, head of Invesco PowerShares. "It's about this being an important tool for many investors from a diversification perspective."

Still, that doesn't mean low-vol has the all clear. If gains continue, even if modest, momentum will slip into the trade again. What's more, macro drivers like the Federal Reserve also present a risk to low-volatility, Hayes said.

"The concerns now are harder to quantify and are more about things like a reaction to interest rate changes," said Hayes. "Like if the Fed hikes in June and keeps hiking, a lot of low-volatility stocks are associated with dividend yield. That cohort of investors could be at risk from those selling off."

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