iShares min vol ETFs: passing the five-year test

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.

tables-v4
Past 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 track MSCI 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.

The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by visiting www.iShares.com or www.blackrock.com.

Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets and in concentrations of single countries. The iShares Minimum Volatility ETFs may experience more than minimum volatility as there is no guarantee that the underlying index’s strategy of seeking to lower volatility will be successful.

Shares of ETFs are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Brokerage commissions will reduce returns. Market returns are based upon the midpoint of the bid/ask spread at 4:00 p.m. eastern time (when NAV is normally determined for most ETFs), and do not represent the returns you would receive if you traded shares at other times. Performance shown reflects fee waivers and/or expense reimbursements by the investment advisor to the fund for some or all of the periods shown. Performance would have been lower without such waivers.

This material represents an assessment of the market environment as of the date indicated; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective. Past performance does not guarantee future results.

The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

The iShares Funds are not sponsored, endorsed, issued, sold or promoted by MSCI Inc., nor does this company make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with MSCI Inc.

©2016 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries. All other marks are the property of their respective owners.

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