Smart strategies to navigate volatile markets


It was US statesman Benjamin Franklin who in 1789 said: “In this world nothing can be said to be certain, except death and taxes.” Wind the clock forward some 200 years and you’d be right to add: “Nothing is certain, except death, taxes and market volatility.” 

Let’s face it, whether you’re talking about the US Presidential election of Donald Trump, or the fallout from Brexit, or this year’s European elections and referendums, market volatility is a constant - and it’s something that investors need to accept.

Establishing an appropriate asset allocation and staying invested in the markets are fundamental to successful investing. But market volatility can unnerve the most seasoned of investors, causing them to abandon their plans and jeopardise their long-term investment goals.

In today’s low growth and low return environment, investors are increasingly seeking solutions that will maximise their returns while minimising their risk exposure.

So, how do your convince your clients to stay the course, enabling them to optimise their investment returns regardless of market volatility?

One option to consider is the inclusion of smart beta strategies as part of a portfolio.

Like traditional beta strategies, smart beta also use rules-based indexes, but seek specific investment outcomes by targeting exposures to one or more factors. Investing in factor-driven indexes that implement smart beta strategies can provide opportunities to seek improved returns, reduced risk or enhanced diversification.

One of the most effective smart beta strategies for achieving a reduction of risk are known as ‘minimum volatility’ strategies, which are specifically designed with this goal in mind, seeking to deliver market-like returns with less volatility by targeting lower volatility stocks.

Smart Beta can act as a substitute for low-risk strategies, they can retain the potential for investment returns, while increasing transparency, lowering costs and importantly, reducing unintended risks by specifically targeting lower volatility stocks.

iShares Edge Smart Beta ‘minimum volatility’ strategies aim to deliver market-like returns with less risk by specifically targeting quality and less volatile stocks that are underpriced and likely to be more stable when markets are unsettled. These ETFs follow indices that screen for low volatility stocks, consider the correlations between stocks and include protections to limit sector and country concentrations.

By doing so, as the chart below shows, the indices which the iShares’ minimum volatility ETFs seek to track have historically lost less during market declines but have still captured meaningful gains during market upswings.

Base/minimum volatility portfolio

iShares’ minimum volatility ETFs can be used as the core of your client’s portfolio because of the way their MSCI indexes are constructed - sectors and countries are tightly constrained to +/- 5% of the broad market index to ensure that each portfolio is representative of the market.

To better illustrate this, consider the following chart. By replacing a traditional equity portfolio with minimum volatility ETFs, over a 10-year period, risk-adjusted returns improved and drawdowns were reduced by almost 30 per cent, which demonstrates the potential benefits of using minimum volatility ETFs as a core equity replacement for investors.

Graph Reducing risk

Advisers seeking a low-risk active strategy for their clients can turn these insights into action by considering iShares’ two ‘minimum volatility’ ETFs -

iShares Edge MSCI Australia Minimum Volatility ETF (MVOL) and iShares Edge MSCI World Minimum Volatility ETF (WVOL).

Both funds can be used as core equity investments that seek to deliver market-like returns with less risk. They aim to help investors weather the ups and downs of the market better, providing them with the confidence and peace of mind to stay invested for the long-term.

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