Volatility, Handled: Smooth the Bumps with the iShares USMV ETF

With first quarter 2021 earnings reports in full swing, investors may want to mute the volatility with assets like the iShares Edge MSCI Minimum Volatility USA ETF (USMV).

“Volatility can be like your breath,” a TD Ameritrade article said. “A big inhale can be thought of as rising realized volatility or implied volatility (IV), and a big exhale can be viewed as falling realized volatility or IV.”

“Realized volatility is simply a measurement of how much a stock swings—up or down over a given time period—and expressed as a percentage,” the article explained. “IV is the options market’s way of making an educated guess on the amount of future volatility in the underlying and pricing that volatility risk into the options. Remember: The larger the implied volatility reading, the more expensive the options prices.”

USMV seeks the investment results of the MSCI USA Minimum Volatility (USD) Index. The fund will invest at least 90% of its assets in the component securities of the index and may invest up to 10% of its assets in certain futures, options and swap contracts, cash, and cash equivalents.

The index 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.

USMV Chart

Under the Hood of ‘USMV’

What’s under the hood USMV that gives the fund its low volatility characteristics? Top holdings include names like Microsoft, Johnson & Johnson, Accenture, and McDonald’s.

Additionally, the fund is never too top heavy on one stock. It’s largest holding, Microsoft, only comprises 1.65% of the fund’s assets (as of April 7).

“This fund can be used as an alternative to broad-based domestic equity funds, though the shallow nature of the underlying portfolio may be a concern,” an ETF Database analysis explained. “Perhaps a better use would be as a way to dial down the overall risk of an equity portfolio, essentially allowing investors to scale back their downside loss potential while still maintaining some up side.”

Furthermore, cost-conscious investors will like the 0.15% expense ratio.

“USMV is appealing in the sense that it allows investors to achieve cheap, easy exposure to a strategy that would be difficult and time consuming to implement under the ‘do it yourself’ methodology the expense ratio is extremely low given the methodology employed, and the strategy offered can be a simple but effective way to fine tune the overall risk of a portfolio,” the analysis added.

USMV Chart

For more news and information, visit the Smart Beta Channel.