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A Less Volatile Basket Of Global Stocks

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A Less Volatile Basket Of Global Stocks
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The low volatility factor that's widely applied to U.S. equities has, thanks to exchange traded funds, made its way to international and global equity funds. A popular example is the iShares Edge MSCI Min Vol Global ETF (CBOE: ACWV).

ACWV is the reduced volatility spin on the widely followed MSCI ACWI Index. The ETF, which is nearly seven years old, tracks the MSCI All Country World Minimum Volatility Index.

What Happened

Over the past three years, ACWV has outperformed the MSCI ACWI Index by 50 basis points while living up to its low volatility billing. ACWV's annualized volatility during that period was 370 basis points below that of MSCI ACWI Index.

ACWV “is a well-diversified global stock portfolio that takes a holistic approach toward reducing volatility for a low fee. It should offer a smoother ride and better risk/reward profile than most of its peers over the long term.” said Morningstar in a research note out last week.

The $3.42 billion ACWV holds 420 stocks. Global ETFs, such as ACWV, typically feature large allocations to U.S. equities and that's true of this iShares fund. Nearly 56 percent of ACWV's holdings are domestic stocks.

Why It's Important

There's more to ACWV's methodology than simply targeting stocks with favorable volatility characteristics.

“This strategy doesn’t just target the least-volatile stocks. It also takes into account how stocks interact with each other to affect the portfolio's overall volatility,” said Morningstar. “The fund’s global reach creates better diversification opportunities than a narrower minimum-variance strategy, which should facilitate a slightly greater reduction in volatility relative to its parent index.”

While ACWV can feature emerging markets exposure, it does to a modest tune of about 8 percent spread across Taiwan, China and India. Japan and Switzerland are ACWV's second- and third-largest country weights, respectively, combining for about 17 percent.

What's Next

ACWV has been a solid performer this year, though it has lagged traditional equity benchmarks. The ETF is up just over a third of a percent, which is a better performance than those offered by some conventional domestic low volatility strategies. Since inception, ACWV has been a solid performer.

“From November 2011 through August 2017, it exhibited 24 percent less volatility than its parent index. It also outpaced the benchmark by 0.76 percentage points annualized during that time,” according to Morningstar.

The research firm has a Silver rating on ACWV.

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