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Going Global In Search Of Reduced Volatility

Going Global In Search Of Reduced Volatility

The hunt is on for low volatility opportunities, but investors don't need to focus that effort solely on U.S. equities. Some global exposure can be sprinkled into the mix with exchange traded funds, such as the iShares Edge MSCI Min Vol Global ETF (CBOE: ACWV).

What Happened

The $5.14 billion ACWV follows the MSCI All Country World Minimum Volatility Index, the low volatility counterpart to the popular MSCI All Country World Index. ACWV, which is about two months shy of its eighth anniversary, holds 444 stocks.

While this is scenario isn't guaranteed to repeat if global stocks surge, year to date, ACWV is beating its traditional equivalent, the iShares MSCI ACWI ETF (NASDSAQ: ACWI). In fact, ACWV's advantage of ACWI is a rather noticeable 330 basis points.

Why It's Important

“This strategy uses constraints to promote diversification. It limits individual stocks to 1.5% of the portfolio while country and sector weights are held within 5% of their weights in the parent index,” said Morningstar in a recent note. “Turnover also gets capped at 10% during each semiannual rebalance to mitigate trading costs. The portfolio holds less than 20% of the stocks in its parent index. But it still diversifies stock-specific risk with only 10% of its assets in its 10 largest names.”

None of ACWV's holdings exceed weights of 1.32%. The fund allocates nearly 18% of its weight to financial services stocks and almost a quarter of its combined weight to the consumer staples and technology stocks. As a global fund, ACWV can and does feature U.S. exposure with the world's largest economy representing over half the fund's geographic weight.

While defensive strategies tend to lag in bull markets, the downside protection offered in turbulent times is worth the trade off as ACWV is highlighting this year.

What's Next

Past performance isn't a guarantee of future returns, but ACWV's long-term track record is impressive.

“This approach has worked well. Between October 2018 and December 2018, the MSCI ACWI declined by 12.8%, while the fund lost about half that figure,” said Morningstar. “And it was 27% less volatile than the benchmark from its launch in October 2011 through May 2019. Less risk pushed its risk-adjusted returns to the top of the world large-stock Morningstar Category over that stretch.”

The research firm has a Silver rating on ACWV.

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