iShares Adds Small-Cap Version of Popular Low-Volatility ETF Strategy

Building on the success of its iShares Edge MSCI Min Vol USA ETF (NYSEArca: USMV), BlackRock’s iShares rolled out a minimum volatility exchange traded fund that focuses on the small market-capitalization segment U.S. markets.

BlackRock has launched the iShares Edge MSCI Min Vol USA Small-Cap ETF (BATS: SMMV). SMMV has a 0.20% expense ratio.

Like USMV, SMMV focuses on equities that have lower volatility characteristics relative to the broader equities market, except the new ETF targets small-cap stocks. The minimum volatility strategy is seen as a way for investors to gain exposure to small capitalization stocks with potentially less risk, which may diminish potential drawdowns during market sell-offs.

“Low volatility is one of the few factors that have historically performed well in turbulent markets,” according to a MSCI research note, Constructing Low Volatility Strategies. “Moreover, over long periods of time, this defensive strategy has produced a premium over the market, contravening one of the most basic theories in finance — that one should not be rewarded with greater returns for taking less than market risk.”

Specifically, the iShares Edge MSCI Min Vol USA Small-Cap ETF tries to reflect the performance of the MSCI USA Small Cap Minimum Volatility Index.

“MSCI seeks to construct a portfolio of the lowest absolute volatility using its multi-factor risk model, and then the portfolio is further refined by an optimization tool that aims to determine the lowest absolute volatility based on the projected ‘riskiness’ of securities in the Parent Index while subjected to constraints based on established minimum and maximum weightings of index constituents and sectors as well as factor constraints (for example, liquidity and financial leverage) as measured by MSCI,” according to the prospectus sheet.