The strategist attributes the outperformance lower volatility to structural impediments and a behavioral bias. Specifically, structural impediments or rules and restrictions that may make some investments off limits to certain investors, which have fueled a preference toward high-flying stocks in hopes of higher returns. Behavioral bias refers to the observation that the average investor may not be rational and may bet on higher flyers even in the face of greater risks.
ETF investors interested in the minimum volatility strategy have a number of options across various markets to choose from. For instance, the iShares MSCI USA Minimum Volatility ETF (NYSEArca: USMV), which tracks the MSCI USA Minimum Volatility Index, selects U.S. stocks based on variances and correlations, along with other risk factors.
Investors can also target European market exposure through the iShares MSCI Europe Minimum Volatility ETF (NYSEArca: EUMV).
ETF investors can also take the low volatility theme to broader overseas markets. The low-volatility ETFs have helped soften the blow from the global sell-off. For example, the iShares MSCI EAFE Minimum Volatility ETF (NYSEArca: EFAV) provide a low-volatile option for developed overseas markets. The even broader iShares MSCI All Country World Minimum Volatility ETF (NYSEArca: ACWV) employs the MSCI minimum volatility selection process on the benchmark All Country World Index. Additionally, investors can target emerging market exposure through the iShares MSCI Emerging Markets Minimum Volatility ETF (NYSEArca: EEMV), a low-vol variant on the widely observed MSCI Emerging Market Index.
However, potential investors should be aware that since these ETFs focus more more slow and stable companies, the low volatility strategy may underperform more growth-oriented stocks if the markets turn around. Ang points out that during periods when volatility was highest, min-vol strategies outperformed the market by an average of 8% with nearly 6% less risk. On the other hand, low-vol portfolios underperformed by about 2.5% on average and risk reduction was limited to 0.2% during periods of low-volatility.