Low volatility exchange traded funds are one of the hottest segments of the ETF space this year, but investors do not need to limit their affinity for the low volatility factor to U.S. stocks. There are solid options among global and international low volatility funds, including the iShares Edge MSCI Min Vol Global ETF (NYSEArca: ACWV).
As is the case with US-focused low volatility ETFs, 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 equity markets surge.
The low-volatility factor investments work on the idea that they help cushion against market turns, limiting drawdowns that investors experience while providing upside potential. Consequently, the low- or min-vol strategies may produce better risk-adjusted returns over the long haul, which has been backed by extensive academic research.
MSCI, though, pointed out that the min-vol index is within one standard deviation of its historic premium to the market, so the strategy is not too overvalued, yet.[related_stories]
Consequently, the chances of the strategy falling off ahead is more likely. Nevertheless, there is a chance of a more serious market plunge, which could cause the min-vol strategy to shoot up, with valuations growing to a much higher premium.