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.
“There is also research showing that diversifying portfolios to include international stocks increases long-term returns and reduces volatility. Because the majority of public companies occur outside the United States, a U.S.-only portfolio is an active choice to not invest in the total market. According to Fidelity, during the period of 1950-2014, the addition of 30% International developed stocks to a portfolio of U.S. stocks increased annualized returns and Sharpe Ratio, and decreased the standard deviation (volatility),” according to a Seeking Alpha analysis of ACWV.
ACWV allocates over 57% of its lineup to U.S. stocks with Japan at 12.7% being the only other country to command a double-digit weight in the ETF. China, Switzerland and Canada round out ACWV’s top five geographic weights.
Nine of ACWV’s top 10 holdings are U.S. stocks with healthcare, financial services and consumer staples names combining for over 48% of the ETF’s sector weight.
ACWV charges 0.2% per year, or $20 on a $10,000 investment.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.