WHAT IS MINIMUM VOLATILITY INVESTING?

Minimum volatility investing seeks to build a portfolio of stocks that exhibits less variability than the broad market. It aims to provide investors with a smoother ride within equity allocations by creating a portfolio that exhibits less swings — up or down — than the market.

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  • iShares ETFs cover a broad range of asset classes, risk profiles and investment outcomes. To understand the appropriateness of this fund for your investment objective, please visit our product webpage.

    iShares ETFs cover a broad range of asset classes, risk profiles and investment outcomes. To understand the appropriateness of this fund for your investment objective, please visit our product webpage.

    Find out more about iShares Edge MSCI World Minimum Volatility ETF (WVOL)

    https://www.blackrock.com/au/individual/products/284667/

    This product is likely to be appropriate for a consumer who is seeking capital growth, using the product for a major allocation of their portfolio or less, with a minimum investment timeframe of 5 years, and with a medium to high risk/return profile.

    Find out more about iShares Edge MSCI Australia Minimum Volatility ETF (MVOL)

    https://www.blackrock.com/au/individual/products/284666/

    This product is likely to be appropriate for a consumer who is seeking capital growth, using the product for a core component of their portfolio or less, with a minimum investment timeframe of 5 years, and with a medium risk/return profile.

KEY TAKEAWAYS

  • Minimum Volatility investing seeks to reduce risk by investing in a portfolio of stocks that exhibits less volatility than the broad market.
  • Minimum Volatility investing has been around for decades and is supported by economic theory and empirical data. 1
  • Minimum Volatility strategies consider individual stock price fluctuations, as well as how the stocks interact with each other, to build a portfolio with less risk than the broad market.

WHY MINIMUM VOLATILITY INVESTING?

Imagine that you’re a hiker who has two potential paths to climb a mountain. One trail is very challenging. It’s steep, rocky, and has several parts where the path has sharp descents. While the trail is exhilarating, there is also the increased risk of injury or falling. Alternatively, there is a second trail that is more gradual and stable. While this trail may be less exciting, there is a much lower chance of getting injured or hurt.

In this analogy, a minimum volatility strategy would look more like the second trail — less risky and designed to be more stable. A min vol portfolio can help investors navigate the risks of big fluctuations in the market. Just as hikers can still reach the summit of the mountain on a less challenging trail, investors can still pursue their investment goals while seeking to avoid stomach churning volatility.

Min Vol, like all our factor investing options, has an economic rationale for why it has existed historically, and this style of investing has persistently lowered risk in portfolios when compared to the broad market. In fact, the MSCI World Minimum Volatility Index has had ~20% less volatility than the MSCI World Index since inception.2

Investors can use minimum volatility strategies to provide ballast in their portfolios and allow them to stay invested during periods of market turmoil.

Historically, academic research has also found that less volatile stocks have outperformed their more volatile peers over time.3 Several theories have been posed to explain the historical outperformance. For example, many institutional investors have high return targets that they seek to reach. Some of these investors are structurally prohibited from using leverage in their portfolios. In order to reach their high return targets, they end up overweighting more volatile companies, hoping to capture more of the equity premium. This may have led to a persistent, systematic underweight to less volatile companies.

Another explanation could be that some investors seek stocks with the potential for a high payout. Sometimes referred to as the “lottery effect”, there may be groups of investors that are willing to overpay for riskier and more volatile companies for betting potential high returns. The preference for a potential large return may have also led to a persistent underappreciation of less volatile stocks.

iSHARES MINIMUM VOLATILTY ETFs

iSHARES MINIMUM VOLATILTY ETFs


OUR APPROACH TO MINIMUM VOLATILITY INVESTING

BlackRock looks at individual stock volatility and correlations when evaluating a minimum volatility portfolio.4

Caption:

  
Metric Objective
Stock volatilityIdentify how volatile an individual stock has been based on standard deviation
CorrelationsUnderstand how stocks move relative to each other based on several factors

Source: BlackRock, MSCI. Stock volatility - Standard deviation describes the variation of a set of returns away from the average (mean) return. Correlations - Factors include macro factors (e.g., country, industry, etc.), style factors (e.g., value, quality, momentum, etc.), as well as individual stock specific risk.

Minimum volatility investing looks to build a portfolio with less risk than the broad market– not just a collection of less risky stocks. The strategy considers how the underlying stocks move relative to each other.

Unlike the other factors we believe in at BlackRock, the primary goal of minimum volatility is to reduce overall risk in portfolios. Minimum volatility ETFs such as iShares Edge MSCI World Minimum Volatility ETF (WVOL) can be used as a tool in a long-term strategic asset allocation to help lower the overall risk and stay invested. 

The beauty of minimum volatility strategies is their ability to significantly reduce risk in portfolios while allowing investors to maintain dedicated equity exposure. This means investors can continue participating in equity rallies, unlike other asset classes that investors may pivot to in periods of market turbulence, such as fixed income or cash.

Since inception in 2011, iShares Minimum Volatility ETFs have captured meaningful gains during upswings, and minimized losses during declines in U.S., international and emerging markets shielding portfolios and allowing investors to stay invested through market cycles as the table below.

Minimum Volatility: Upside/Downside Capture

 
Graph Minimum Volatility: Upside/Downside Capture

The figures shown relate to simulated past performance. Simulated past performance is not a reliable indicator of current or future results. Source: BlackRock, MSCI, S&P, as of 30/11/2023. Figures shown for 31/12/1999 – 30/11/2023. Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index. The value of an investment can fall as well as rise and investors may not get back the original amount invested. There is a risk that the entire amount invested may be lost. Past performance is not a reliable indicator of current or future results. BlackRock makes no representations or warranties as to the accuracy or completeness of any past, estimated or simulated performance results contained herein, and further nothing contained herein shall be relied upon as a promise by, or representation by BlackRock whether as to past or future performance results.

MINIMUM VOLATILITY IN PORTFOLIOS

One question investors sometimes ponder — do minimum volatility funds essentially just buy a bunch of consumer staples and utility companies? Am I better off just buying a sector fund that invests in only consumer staples stocks?

The MSCI Minimum Volatility Indexes explicitly apply sector limits relative to the sector weights in the underlying parent indexes at each rebalance.5 This constraint was purposely applied to help prevent unintended overweight to “safe haven” sectors. This sector-controlled approach makes minimum volatility attractive as a core position in a portfolio.

Sector weights
Graph Sector weights

Source: MSCI as of 30 November 2023

As highlighted in the chart above, minimum volatility tends to naturally overweight the utilities and consumer staples sectors; however, the sector caps play an important role in helping min vol seek to capture more upside on a relative basis, if equity markets rally.

A focus on factor styles, such as minimum volatility, has historically provided enhanced returns and/or reduced risk. Sectors, on the other hand, are a source of unrewarded, active risk in portfolios.

ETFs CAN GIVE EASY ACCESS TO MINIMUM VOLATILITY INVESTING

Asset allocation and staying fully invested in equity markets are often two key drivers of portfolio performance. But time and time again, we see many cases where even the most disciplined investors abandon their plan as volatility rises and markets sell off.

Accessing minimum volatility through a low-cost ETF such as the iShares Edge MSCI World Minimum Volatility ETF (WVOL), seeks to mitigate risk and volatility in portfolios and allows investors to stick with their long-term plans and financial goals.

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