More conservative investors can utilize a low-volatility global equity exchange traded fund to gain exposure to international stocks that display smaller oscillations.
For instance, the iShares MSCI All Country World Minimum Volatility ETF (NYSEArca: ACWV) takes about 340 of the least volatile stocks from the parent MSCI All Country World Index, selecting components based on the Barra Global Equity Model, along with a number of constraints to limit turnover. Due to the proprietary nature of the selection process, data on the estimated risk inputs are not readily available, writes Morningstar analyst Patricia Oey.
The low volatility strategy tries to exploit the phenomenon where smaller price fluctuations typically outperform portfolios with larger oscillations over the long-term. [Low-Volatility ETFs Outperform in Shaky Market Conditions]
The “underlying MSCI indexes generally exhibit less-dramatic declines in bear markets,” Oey said. “Over the long term, these muted drawdowns explain much of the strategy’s outperformance versus its cap-weighted benchmark.”
The so-called volatility anomaly was first highlighted in 1968 by Bob Haugen. Haugen argued that investors tend to chase after riskier assets to juice returns, which can push up prices on riskier stocks and result in diminished future returns, relative to less-volatile stocks.
In back-tested historical data, the trailing 15- and 10-year performance of ACWV’s underlying index through the end of 2014 beat the cap-weighted MSCI ACWI by 393 and 202 basis points annualized, respectively, at a better risk-adjusted return.
However, potential investors should be aware that low-volatility strategies can underperform during short periods, especially in bull market conditions when riskier growth stocks typically outperform conservative, low-vol plays.
ACWV includes heavier tilts toward less-volatile sectors. The ETF’s sector positions include financials 16.9%, health care 16.5%, consumer staples 14.5%, consumer discretionary 9.8%, telecom services 8.8%, utilities 8.7%, tech 8.5%, industrials 7.9%, materials 4.5% and energy 3.4%.
Regional weights include a large 50.6% tilt toward the U.S., along with 12.6% in Japan and 10.3% in Europe.
Furthermore, as a global-equity fund, ACWV is slightly more volatile than a U.S.-centric low-volatility fund since the All-Country World Minimum Volatility ETF is exposed to both international equities and foreign currency risks. For instance, the strengthening U.S. dollar and depreciating foreign currencies has weighed in the fund’s performance.
For more information on global markets, visit our global ETFs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.