Minimum Volatility ETFs: Five Years Later

blackrock-logoBlackRock’s Head of Smart Beta Sara Shores examines the performance of the iShares minimum volatility ETFs and reasons why investors should consider them for the long term.

iShares minimum volatility ETFs were thrown into a formidable proving ground when the first four were launched in 2011. For the past five years, global growth concerns and unforeseen events like Brexit have fueled turbulent markets that have repeatedly tested the ability of minimum volatility ETFs to reduce risk.

Because iShares minimum volatility ETFs are designed to reduce risk over the long term, the fifth birthday of these four min vol ETFs is the right time to evaluate how they have fared for investors and to revisit some benefits they can offer.

The five-year-old ETFs are: iShares Edge MSCI Min Vol USA (USMV), iShares Edge MSCI Min Vol EAFE ETF (EFAV), iShares Edge MSCI Min Vol Emerging Markets (EEMV) and iShares Edge MSCI Min Vol Global (ACWV).

Here are five key points investors should consider about these five-year-old ETFs:

1. Delivered market-like returns, but with less risk than the overall market

Since their 2011 inception, these four iShares min vol ETFs have delivered between 15% to 20% less risk than their broader market indexes on an annualized basis. They have significantly captured less downside during volatile markets, but also, less upside during market rallies—just as these ETFs were designed. The long-term result has been market-like returns, but with less risk. For example, USMV has posted an annualized net gain of 14.6% versus the 14.2% gain of the S&P 500 Index, their volatility (as measured by standard deviation) has been 8.4% and 10.3%, respectively.1

2. Attractive risk-adjusted returns versus other funds

Because USMV’s market-like returns have come with less risk, its risk-adjusted returns (a measure of how much risk is involved in generating a security’s return) have been better than 99% of large-cap domestic equity mutual funds and ETFs since its inception.2

3. Potentially helps investors stay invested long term

Many investors are driven by emotion, piling into the market at their highs and selling off near their lows. Because iShares min vol ETFs have captured less downside during market volatility, they have the potential to help investors weather market turbulence and stay invested long term.

The 2016 Brexit vote and August 2015 are two periods when the Dow Jones Industrial Average swung hundreds of points up and down, at times in the same trading session. While iShares min vol ETFs have generally captured less downside during these periods, keep in mind that the larger impact of their risk reduction was seen over the five-year period. See the table below.

undefinedPast performance does not guarantee future results. For standardized performance, click here.

4. Can be used a portfolio building blocks

Beyond being potential risk reducers, iShares min vol ETFs can function as building blocks for a portfolio’s foundation. iShares min vol ETFs seek to trackMSCI indexes which have sector and country exposures that are tightly constrained to +/-5% of a broad market index. So, the ETFs offer similar diversification as the broad market.

5. These ETFs are older than they seem

These four iShares minimum volatility ETFs may have launched five years ago, but they were founded on a principle called the “low volatility anomaly,” which was first identified in the 1970s. The low volatility anomaly is largely driven by the investor’s risk-seeking tendency to overlook and underpay for lower risk stocks and to chase and overpay for higher risk, more volatile stocks.3 This results in lower risk stocks being less vulnerable to wild swings in price.

The ability of these four min vol ETFs to reduce risk over the past five years has sparked demand for iShares to increase the number of its min vol ETFs to 12. While the markets will not always be volatile, they inevitably will have volatile periods, making min vol ETFs designed for the long term worth considering.

1 Morningstar, as of 10/14/2016.Returns based on fund and index returns; risk based on standard deviation from 10/18/2011 – 10/14/2016. Past performance does not guarantee future results.

2 Morningstar, as of 10/14/2016.As measured by The Sharpe Ratio, industry standard for calculating risk-adjusted returns. Past performance does not guarantee future results.

3 Haugen and Heins (1975).

Sara Shores is Global Head of Smart Beta for BlackRock and a regular contributor to The Blog.

This article is brought to you courtesy of BlackRock.