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Smart Beta: Minimum Volatility ETFs

In the third in our series explaining the different factors investors can add to their portfolios through strategic beta ETFs, Kenneth Lamont talks minimum volatility

Kenneth Lamont 7 September, 2017 | 4:06PM

 

 

 

Kenneth Lamont: Today I would like to continue our introduction to strategic beta series by taking a look at minimum volatility. Passive low-volatility strategies have become one of the best performing and most popular strategic beta strategies. In the past three years alone, passive min vol funds have attracted over €3 billion in net inflows.

Simply put, minimum volatility investing involves selecting a portfolio of low risk stocks. This strategy has rewarded investors with superior risk-adjusted returns compared with cap weighted alternatives.

Common metrics used to determine a low risk stock are standard deviation, downside standard deviation and beta.

It is unsurprising given the defensive nature of minimum volatility investing that these strategies have helped cushion the blow in market downturns, but have also lagged their cap-weighted counterparts in upswings.  Investors should not expect these strategies to generate market-beating returns, but they should offer a smoother ride and outperform most of its peers on a risk-adjusted basis.

Investors in low volatility strategies should be aware that they are making an implicit quality bet – as lower volatility stocks also tend to operate with lower leverage and have more stable earnings growth.

The highly quantitative nature of minimum volatility strategies makes them a perfect fit for the rules based approach of passive investing.

Currently we have awarded a Silver rating to four of the iShares Edge Min Vol range – which cover World, emerging markets, US large caps and European equities. These funds apply several constraints, such as sector constraints to ensure that investors are not making unintended bets.

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Kenneth Lamont  is a passive funds research analyst for Morningstar Europe.