Slow and steady wins the race. Investors seeking an exchange traded fund strategy that can produce attractive risk-adjusted returns over the long haul should take a look at the low-volatility theme.
“Imagine a race between a speedy, boastful hare and a steady, quiet tortoise,” Andrew Ang, Head of BlackRock‘s Factor Based Strategies Group, mused in a research note. “You can think of minimum volatility strategies as akin to the tortoise – humble and sometimes overlooked, but a formidable participant in the race over the long term.”
The low or minimum volatility strategy targets stocks that have lower expected risk or less idiosyncratic risks. Specifically, the strategy targets equities that exhibit lower beta, a measure of volatility or systematic risk of a security to that of the overall market. Consequently, minimum volatility portfolios are constructed with stocks that exhibit lower market risk or beta.
“But just because these stocks are low risk doesn’t mean they have low returns,” Ang said. “Minimum volatility strategies have delivered reduced risk, but with market-like returns.”
For ETF investors, low-volatility strategies could produce better risk-adjusted returns, or help diminish drawdowns during times of heightened market selling while allowing an investor to participate in any upside.[related_stories]
Ang compared the MSCI USA Index to the MSCI USA Minimum Volatility Index from January 1, 2001 to January 31, 2016 and found that the minimum volatility index produced better risk-adjusted returns. Over the period, the standard market cap-weighted U.S. index showed an average 4.63% return with a 15.11% measure of risk, whereas the U.S. minimum volatility index had a 6.65% return and a 11.54% risk measure.