When equities swooned in the fourth quarter, investors turned to low volatility exchange traded funds, such as the iShares MSCI USA Minimum Volatility ETF (Cboe: USMV). Although stocks are rebounding this year, some investors remain devoted to the low volatility factor and the related ETFs.
Low-volatility portfolios tend to offer above-average downside protection in exchange for below-average upside participation. Over the long term, this should translate to better risk-adjusted (not absolute) returns for investors in low-volatility stocks,” according to Morningstar.
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.
“The iShares Edge MSCI Min Vol USA ETF (“USMV”), which tracks the MSCI USA Minimum Volatility Index (“Index”) is one such minimum volatility strategy which can help investors position their portfolios to better withstand periods of market turmoil,” said BlackRock in a recent note.