Market Overview

A Less Risky ETF With Plenty Of Rewards

A Less Risky ETF With Plenty Of Rewards

The primary objective of low volatility exchange traded funds is to defray risk and drawdowns when markets retreat, not capture all of the upside offered by a bull market. Even with that in mind, investors aren't being cheated by volatility-reducing ETFs this year.

The iShares Edge MSCI Min Vol USA ETF (CBOE: USMV), the largest fund in this category, is higher by almost 26% year to date. Home to 209 stocks, USMV follows the MSCI USA Minimum Volatility (USD) Index and is doing its job of limiting turbulence as it has been 300 basis points less volatile than the S&P 500 this year.

In other words, USMV investors are obviously winning due to the fund's price appreciation, but they're also winning the low volatility game.

Why It's Important

“One strategy that has been appealing when it comes to capturing less market downside is minimum volatility,” BlackRock said in a recent note. “Minimum volatility is designed to reduce risk, while maintaining 100% equity exposure. Why is this important? Humans tend to experience the pain of losses more than the joys of equivalent gains, a bias known as 'loss aversion.'”

Although none of USMV's holdings command more than 1.51% weight of the fund's weight, components such as Coca-Cola (NYSE: KO) and PepsiCo (NASDAQ: PEP) don't exactly qualify as “exciting.” Upon closer examination, however, USMV reveals a more exciting, though not high risk profile. For example, the fund devotes 18% of its weight to technology stocks, an above-average weight to that sector among “low vol” ETFs.

Additionally, data suggest USMV's upside capture ratio is solid.

“When we say that US minimum volatility has captured 80% of the upside of the S&P 500 but only 59% of the downside, many investors assume that means the strategy has lagged but with lower risk,” according to BlackRock. “Yet, since its inception in 2008, minimum volatility has outperformed the S&P 500 by 2% annualized.”

What's Next

USMV has been doing brisk business this year. Of its $36.61 billion in assets under management, more than $14 billion, including $1.9 billion for the week ended Nov. 27, have flowed into the fund this year. That makes USMV the top asset gatherer among all U.S.-listed ETFs.

“Strategies that focus on limiting volatility can add resilience, while offering investors the comfort to stay invested in the market through all environments,” according to BlackRock. “Think of upside/downside capture as one way to provide clarity on the road to pursuing long-term investment objectives.”

Related Links:

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Evaluating The Australia ETF's Risk Profile


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