Investors who still want their foot in the market but are wary of volatility weighing on their portfolios can turn to low-volatility exchange traded fund strategies that could generate more attractive risk-adjusted returns.
For instance, investors can utilize something like the iShares MSCI USA Minimum Volatility ETF (NYSEArca: USMV), which selects stocks based on variances and correlations along with other risk factors. The low-vol strategy has helped dampen the fallout in the recent sell-off. Year-to-date, USMV is only down 3.7%, compared to the S&P 500’s 7.3% decline.
“We think USMV is strong ETF for consideration for investors wanting to reduce the risk considerations of their overall U.S. equity exposure,” Todd Rosenbluth, Director of ETF & Mutual Fund Research, said in a research note. “The ETF is diversified across all 10 sectors, but holds the least volatile securities within the sector. iShares, working with an MSCI benchmark, uses sector bands (+/- 500 basis points relative to a parent MSCI index at the semi-annual rebalance).”
USMV includes a heavy 21.2% tilt toward financials, 18.9% health care, 14.8% information technology and 15.1% consumer staples. Due to its alternative indexing methodology, USMV is underweight tech, compared to its parent MSCI Index, and overweight the other three areas.
Rosenbluth also pointed out that USMV has exhibited a below-average three-year standard deviation of 9.1, compared to a 10.5 standard deviation for ETFs that track the S&P 500. Standard deviation is the measure of dispersion a security has shown from its mean, so a higher number reflects wider swings or greater volatility.
Due to the recent uptick in market volatility, Daniel Gamba, managing director and head of BlackRock’s iShares Americas Institutional Business, told S&P Capital IQ in late January that institutional investors have grown more tactical in using minimum volatility products to lower risk.