Momentum for low volatility exchange traded funds, such as the iShares MSCI USA Minimum Volatility ETF (NYSEArca: USMV), cooled in the latter stages of 2016, but USMV still merits consideration for conservative investors looking to participate in equity market upside.
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, the index purveyor for USMV’s underlying benchmark, highlights beta, the degree to which stocks tend to move in the same direction as the market, along with dividend yields. Low-vol ETFs have been strengthening this year as they limited downside risk when the markets slipped and strengthened on increased defensive bets during turbulent times.
“As the name suggests, the fund’s managers seek to invest in a portfolio of U.S. equities that, in aggregate, have lower volatility characteristics relative to the broader equity market. With a relatively low expense ratio of 0.15%, it is easy to understand why this fund has drawn the interest of investors to the tune of more than $12 billion in net assets,” according to Investopedia.
None of USMV’s 184 holdings command more than 1.6% of the ETF’s weight. Five of the ETF’s top 10 holdings are members of the Dow Jones Industrial Average. Healthcare is USMV’s largest sector exposure at 18.5% and although it is a minimum volatility fund, technology is the second-largest sector weight at over 16%.
Fund sponsors attribute the sudden growth in low-vol strategies to retail investors and advisors shifting large chunks of their portfolios away from traditional cap-weighted stock ETFs. Instead, more investors have warmed up to low-vol ETFs that promise to diminish portfolio volatility through stocks that exhibit lower price swings.
Potential investors should be aware that since these low-vol ETFs focus more more slow and stable companies, the low volatility strategy may underperform more growth-oriented stocks if the markets turn around. However, sponsors and analysts argue that the money flowing into low-vol strategies could stick this time as investors look for long-term risk mitigation.
Looking at USMV’s chart, “you can see that the price is trading near the support of the 200-day moving average, which is a common long-term technical level that traders use for placing buy and stop orders. Notice how the moving average propped up the price after it pulled back from the summer high of $46.62. Active traders will likely expect the upward momentum to continue from here and protect their long positions by placing stop-loss orders just below $44.70,” reports Investopedia.
For more information on the low-vol strategy, visit our low-volatility category.
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.