Low volatility exchange traded funds have been hits with investors as proven by the PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV) and the iShares MSCI USA Minimum Volatility ETF (NYSEArca: USMV).
Investors’ appetite for such funds is not limited to U.S.-focused as the iShares MSCI Emerging Markets Minimum Volatility ETF (NYSEArca: EEMV) and the PowerShares S&P International Developed Low Volatility Portfolio (NYSEArca: IDLV) have gained solid followings.
For the investor looking for a truly global approach to reduced volatility there is the iShares MSCI All Country World Minimum Volatility ETF (NYSEArca: ACWV). ACWV, which turns four in October, is now home to $2.2 billion in assets under management, up from $1.7 billion in February. [Big Growth for Low Vol ETFs]
The ETF 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.
“Historically, this fund’s correlation to the S&P 500 has generally been lower than the correlation between the average world-stock fund and the S&P 500 and has been similar to the correlation between the average foreign large-blend fund and the S&P 500. So even though this fund has a 54% weighting in U.S. equities, it does have the potential to provide better diversification (relative to the average world-stock fund) for an investor with a large exposure to U.S. equities,” according to Morningstar.
ACWV’s beta of 0.46% and three-year standard deviation of just 7.57% are pleasant surprises when considering the ETF allocates over 54% of its weight to U.S. stocks. Eight of the ETF’s top 10 holdings are U.S.-based companies.
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. [Globe-Trotting Low Vol ETF]
“In fact, the trailing five-year standard deviation of returns for this fund’s index of 8% was significantly lower than its corresponding cap-weighted index’s 14%. ACWX’s index was also less volatile than the S&P 500’s 12% during that same span. Part of this is due to the benchmark’s relatively lower drawdowns during bear markets. In 2008, when the MSCI ACWI fell 42% and the S&P 500 fell 37%, this fund’s benchmark index declined 25%,” notes Morningstar.
At 12.7%, Japan is the only other country with a double-digit weight in ACWV. The ETF charges just 0.2% per year.
iShares MSCI All Country World Minimum Volatility ETF
