Market Overview

A Good Time To Play Defense

A Good Time To Play Defense

In the first quarter, low volatility exchange traded funds were popular with investors. The iShares Edge MSCI Min Vol USA ETF (CBOE: USMV) finished the first quarter higher by more than 12 percent while hauling in $3.48 billion in new assets, a total surpassed by just three other U.S.-listed ETFs.

What Happened

Investors' renewed affinity for reduced volatility strategies in the first quarter came against the backdrop of rising equity prices following a fourth-quarter that in some part fostered fresh demand for minimum volatility fare.

“The selloff from October 3rd to December 24th dragged the S&P 500 Index down by 20% and the Russell Small-cap index more than 24%,” said BlackRock in a recent note. “This was driven primarily by fears of continued rate hikes by the Federal Reserve, valuation concerns and worries about a global growth slowdown.”

Why It's Important

USMV makes good on its promise to reduce volatility. Over the past three years, the fund's annualized volatility was 9.8 percent, or 270 basis points less than the annualized volatility on the S&P 500. During that span, USMV's maximum drawdown was 12.7 percent compared to 19.30 percent on the S&P 500.

“These large draw-downs are a far cry from the relatively quiet markets seen in recent years, which drove investors to seek exposures to pro-cyclical market areas such as momentum stocks or high yield credit,” said BlackRock. “As investors adjust to a lower growth paradigm, investors may want to consider exposures that either offer limited downside protection such as minimum volatility strategies or that move less in sync with equity and bonds such as in commodities.”

While USMV is positioned defensively, it's not entirely bereft of potential excitement and growth opportunities. The fund allocates 16.39 percent of its weight to technology stocks, its largest sector weight. Healthcare and financial services names combine for almost 27 percent of USMV's weight.

What's Next

Data confirm that investors are embracing low volatility ETFs, sometimes at the expense more volatile factor strategies.

“Minimum volatility strategies are attracting the biggest flows this year among factors, gaining $5.78 billion, while momentum has seen nearly $0.6 billion in outflows,” according to BlackRock.

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