The low volatility factor is getting plenty of love these days, and investors looking to ETFs to access that factor should remember it can be applied beyond the confines of U.S. borders. Reduced volatility can also work with a broad basket of global equities as highlighted by the iShares Edge MSCI Min Vol Global ETF (CBOE: ACWV).
ACWV “seeks to track the investment results of an index composed of developed and emerging market equities that, in the aggregate, have lower volatility characteristics relative to the broader developed and emerging equity markets,” according to iShares.
ACWV components are selected and weighted using an optimizer, which aims to reduced expected volatility.
“This strategy also uses constraints to promote diversification. It limits individual stocks to 1.5% of the portfolio while country and sector weights are held within 5% of their weight in the parent index,” said Morningstar analyst Sotiroff in a recent note. “Turnover also gets capped at 10% during each semiannual rebalance to mitigate trading costs. The portfolio holds less than one-third of the stocks in its parent index, but it still diversifies stock-specific risk with only 13% of its assets in its 10 largest names.”
Assessing ACWV
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.
Low volatility strategies are typically favored by long-term investors and ACWV’s has the track record to jibe with that thesis.
“This strategy has worked well. The fund’s volatility was 26% lower than the MSCI ACWI from its launch in October 2011 through June 2020. And its total return mildly beat the benchmark by 14 basis points annually over that period,” notes Sotiroff.
As a global fund, domestic stocks are included and account for about half the roster. ACWV also features large allocations to Japan and Switzerland.
“The sector composition of this fund can change slightly as certain segments become more or less risky. It has modestly tilted toward the utilities and consumer staples sectors while underweighting the more volatile basic materials and energy sectors,” writes Sotiroff.
Morningstar has a Silver rating on ACWV.
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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.
