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Participate in Market Gains, Manage Downside Risks With Minimum Volatility ETFs

·3 min read

This article was originally published on ETFTrends.com.

Investors should consider the potential benefits of a minimum volatility exchange traded fund strategy in an uneven market environment to better manage their core investment client portfolios in troubled times.

In the upcoming webcast, Factor Investing – iShares Factor Strategies For The Core Of Your Portfolio, Anil Rao, executive director, Equity Applied Research at MSCI, noted that factors had performed differently depending on the stage of an economic cycle and ultimately allowed investors to express a view on the market. In this particular instance, the minimum volatility factor can act as a defensive tilt as this market factor has historically outperformed during the contraction or slowdown phase of a normal economic cycle.

Robert Hum, director and U.S. head of iShares Factors ETFs at BlackRock, argued that it may be more important for investors to manage risks and maintain their market exposure instead of trying to time a market rebound. Historical evidence has shown that investors who miss out on top-performing days can hurt long-term returns. For example, looking at a hypothetical investment of $100,000 in the S&P 500 Index over 20+ years ended 2021, the investment would have ended at a value of $$616,317 if an investor just stayed invested, compared to a total return of $389,264 if the investor missed out on just 5 of the best performing days.

As a way to help investors stay invested and manage downside risks, Hum highlighted the iShares Edge MSCI Minimum Volatility USA ETF (USMV) as one way to position defensively. The fund seeks the investment results of the MSCI USA Minimum Volatility (USD) Index, which 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.

The iShares MSCI USA Min Vol Factor ETF has historically exhibited an upside capture rate of 79% and a downside capture rate of 67%. In other words, USMV has provided improved risk-adjusted returns over the long haul. On the other hand, among the 1,429 U.S. equity mutual funds that have been trading before 2011, only ten have a downside capture rate of less than 67%, and none have an upside capture rate of over 79% compared to the S&P 500.

Rao noted that this minimum volatility strategy is not just another defensive overweight utilities sector ETF strategy since it also includes a large information technology component as well. Specifically, the minimum volatility ETF analyzes the volatility of individual stocks in the MSCI USA Index, analyzes correlations across stocks, and constraints sector weights by +/- 5% to the market index (MSCI USA).

For developed overseas market exposure, investors can also consider the iShares Edge MSCI Min Vol EAFE ETF (BATS: EFAV). EFAV seeks the investment results of the MSCI EAFE Minimum Volatility (USD) Index composed of developed market equities that, in the aggregate, have lower volatility characteristics relative to the broader developed equity markets, excluding the U.S. and Canada. The index measures the performance of international equity securities that, in the aggregate, have lower volatility relative to the MSCI EAFE Index.

Additionally, investors can follow the min vol strategy across the developing markets through something like the iShares Edge MSCI Min Vol Emerging Markets ETF (BATS: EEMV). EEMV seeks to track the investment results of the MSCI Emerging Markets Minimum Volatility (USD) Index. The index measures the performance of equity securities in global emerging markets that, in the aggregate, have lower volatility relative to the large- and mid-cap global emerging markets.

Hum also underscored the market-like returns and lower risk exposure for these minimum volatility international strategies that have helped investors better diversify their global equity portfolios. Specifically, the iShares Edge MSCI Min Vol EAFE ETF has exhibited a historical upside capture rate of 70% and a downside capture rate of 61%, and the iShares Edge MSCI Min Vol Emerging Markets ETF showed an upside capture rate of 73% and a downside capture rate of 68%.

Financial advisors who are interested in learning more about the minimum volatility strategy can watch the webcast here on demand.

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