Low volatility ETFs are gaining traction as a way to diversify risk, but investors should still look under the hood of these investments to fully understand the strategies and understand the best ways to incorporate the investment tools into a diversified portfolio.

“One of the major misconception I hear about minimum volatility is that min vol is only about winning by losing less. This is based on the assumption that implementation can only be passive and is perpetuated by market participants that lack the ability to actively manage those strategies,” Alex Piré, Vice President and Head of Client Portfolio Management for Boston-based Seeyond, affiliated with Natixis, said in a note.

For example, Piré underscored the Natixis Seeyond International Minimum Volatility ETF (NYSEArca: MVIN) strategy. MVIN is an actively managed ETF, so the underlying portfolio is re-evaluated continuously and can be traded at any point.

“This is important when managing to such dynamic factor such as low volatility (momentum would be another example of a dynamic factor). Unlike static factors such as size or valuation, dynamic factors are not well suited to passive implementation as the time in between rebalances and turnover constraint can prevent those approaches from adequately tracking the factor yielding significant factor drag in between rebalances,” Piré said.

Piré explained that through active management and the team’s calls, MVIN followed a much more cyclical approach during 2017 but the strategy was able to quickly shift into a defensive position during the volatile upheaval over 2018.

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