By Todd Rosenbluth, CFRA
The CFRA Focus ETF for January is iShares Edge MSCI USA Minimum Volatility (USMV), which earns our top rating. When comparing equity ETFs, CFRA believes investors should combine holdings-level analysis with fund attributes. Our rating includes a review of the risk and reward attributes of the stocks inside, from CFRA’s perspective, as well as performance metrics and costs.
Despite the S&P 500 Index rising 30% year-to-date through December 23, USMV gathered $12.5 billion, the third most net inflows in 2019, ahead of more diversified or risk-taking strategies. The fund’s 27% gain this year has likely helped spur interest, but we think the ability to gain lower-risk access to large-cap equities was appealing to many that were concerned that the Bull ride would not be a smooth one.
However, looking to 2020, CFRA’s Investment Policy Committee has established a year-end 2020 price target for the S&P 500 of 3435, implying a 6.5% price gain over the closing level of December 23. This reflects CFRA equity analysts’ target price differential for all stocks in the S&P 500; historical precedent, such as annual returns during presidential election cycle years; earnings and inflation estimates as well as technical trends. Given a lower expected return, we think investors will continue to focus on ways to reduce their equity risk profile and USMV is built to do just that.
USMV tracks an MSCI index that holds stocks that have incurred minimum variance. This index also has constraints so there is limited sector overweights and underweights. For example, in late December, Information Technology (18% of assets), Financials (16%) and Consumer Staples (12%) were the three largest sectors. Although USMV is not aligned with the S&P 500 Index, we can use the weightings as a guide, and we see that the smart-beta ETF does not take significant beta. For example, Information Technology is 23% of the market-cap weighted ‘500’, while Consumer Staples is 7%.
Yet, while Apple (AAPL) and Microsoft (MSFT) are part of USMV, their weightings are smaller than in the benchmark and smaller than Visa (V), the largest holding at 1.52% of assets.
Beyond the fund’s holdings, USMV is appealing to CFRA for other reasons. The ETF charges a modest 0.15% net expense ratio, trades more than four million shares on daily basis—with a tight penny bid/ask spread—and has bullish technical tendencies. Furthermore, the ETF’s 0.66 three-year beta and 8.9 three-year standard deviation is well below the S&P 500 Index’s 1.0 and 11.9, respectively, highlighting its lower-risk historical attributes.
CFRA expects investor interest to remain strong in 2020 and we find USMV to be a strong fund for the future.
Todd Rosenbluth is Director of ETF & Mutual Fund Research at CFRA.