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.