When it comes to adopting smart beta strategies, market players will look to factor funds like value and growth as prime drivers in today’s equities investing landscape or short duration bonds in the debt market. However, another strategy that is getting its chance to shine is minimum volatility ETFs like the iShares Edge MSCI Minimum Volatility USA ETF (USMV).
Low volatility is a trend that has been growing and could persist as the propensity for market movements ahead looms. Per a CNBC report, “low-volatility exchange-traded funds in particular have attracted some $25 billion in inflows, according to ETF.com, signaling that investors are getting more comfortable with slicing-and-dicing their holdings in hopes of creating a better risk profile.”
USMV seeks the investment results of the MSCI USA Minimum Volatility (USD) Index, which measures the performance of large and mid-capitalization equity securities listed on stock exchanges in the U.S. that, in the aggregate, have lower volatility relative to the broader U.S. equity market.
“We’ve been talking with investors really all year about building resilience into their portfolio, and so quality and minimum-volatility investments have been particularly popular,” said Holly Framsted, BlackRock iShares’ head of U.S. factor ETFs. “USMV is a standout iShares ticker there. It’s actually the fastest-growing ETF globally this year, which is remarkable given that it’s not market-cap weighted.”
“Our portfolio in particular aims to balance exposure across sectors and industries, and so, as a result, we’re investing in some high-volatility stocks and some low-volatility stocks to the extent that they diversify one another. So, really, we’re delivering in USMV a portfolio that is designed to drive market-like returns over time, but with substantially less risk taking advantage of correlation,” Framsted explained.
As more investors begin to adopt factor strategies into their portfolio mix, value investing is starting to resurface as the strategy of choice.
“Think about buying companies that are underpriced relative to their fundamental value. That’s value investing. Buying companies with strong balance sheets and stable earnings is quality investing,” she said Monday.
“These investment characteristics are embedded in things that we already own, so all that has really changed is that the ETF structure has democratized access to these drivers of return, and improvements in technology and measurement have allowed investors to now see what they own and understand what’s driving their portfolio over time, which has really helped … with defensive positioning,” Framsted said. “It’s helped investors understand how to shift allocations in their portfolio in an environment that has been quite uncertain.”
Other volatility-minimizing ETFs to consider include the iShares Edge MSCI Min Vol EAFE ETF (BATS: EFAV) and the iShares Edge MSCI EM Minimum Volatility UCITS ETF (BATS: EEMV).
For more market trends, visit ETF Trends.