A headline on ETF Trends recently referred to low, or minimum, volatility funds as “The New Black.” While it’s always nice to be in vogue, the headline picked up on a trend that we are seeing when it comes to flows of exchange traded products (ETPs).
So far in February, global ETP industry inflows remain positive but have moderated from the record levels we saw in January. However, we’re seeing strong investor interest in minimum volatility – or min vol — ETPs. The concept behind these funds is that they track indexes that seek to capture the broad equity market exposure of a particular market segment – like emerging markets or global stocks — with a reduced amount of volatility. As a category, min vol indexes are designed to deliver lower volatility than traditional market cap weighted indexes by tracking low beta stocks. They seek to provide risk-adjusted returns and protect against some of the downside risks that occur in the market from time to time.
This year through February 19, as the chart shows, min vol funds have attracted average monthly flows of close to $900 million. That is more than double the average monthly flows we saw in 2012 and far above 2011’s average monthly flows of less than $100 million,
Part of that surge in flows is attributable to the fact that ETF providers are offering more of these funds. For instance, at iShares, we introduced our suite of minimum volatility products (EEMV, EFAV, USMV, and ACWV) in late 2011.
In aggregate, there are now 32 ETPs available globally based upon minimum volatility indexes, which together hold $8.2 billion in assets. It’s important to note, though, that there are considerable differences in exposures offered by these ETFs based on the methodology of the indexes they track. Some indexes screen out the most volatile stocks, while others take a more dynamic approach to screening for low beta stocks to track. For instance, the iShares min vol suite of ETFs seeks to track the MSCI family of minimum volatility indexes. To build its indexes, MSCI assesses an individual stock’s volatility compared with the broader market, and it also looks at that stock’s correlation to other stocks in the index.