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Dispelling the myths – Minimum volatility strategies 

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Amid today’s economic and political uncertainties, the financial markets are prone to bouts of unsettling volatility. Investors have turned to minimum volatility exchange traded funds (ETFs) to help weather the turbulence of the markets.

Minimum volatility strategies account for 90 per cent of the 2019 YTD NNB in the EMEA Smart Beta segment (excluding dividend strategies). * Source BlackRock GBI, data as of 31/01/19

Any popular investment will garner its sceptics, and minimum volatility ETFs are no exception. Here, we dispel three common myths associated with minimum volatility strategies. 

Myth 1: Minimum volatility strategies suffer from crowding

DISPELLING MYTH 1 – Minimum volatility strategies have ample capacity

Some investors are concerned that the rising popularity of minimum volatility ETFs will create large flows into lower volatility stocks, and thereby, will reverse the dynamic that minimum volatility ETFs depend on.

Taking a look at stock level ownership dispels crowding concerns about minimum volatility

ETFs. The fraction of total market capitalisation held by minimum volatility strategies is unlikely to merit crowding concerns.

Of the MSCI World’s total market cap of USD35.8 trillion, EMEA-domiciled exchange traded products collectively own 2.18 per cent of this. Furthermore, all EMEA-domiciled minimum volatility ETFs own a mere 0.02 per cent of the MSCI World’s stocks, implying that there is ample capacity remaining in minimum volatility strategies.1,2 

Myth 2: Minimum volatility ETFs are vulnerable to a sell-off

DISPELLING MYTH 2 – Minimum volatility ETFs are performing as intended

The popularity of minimum volatility ETFs has boosted their valuations and their performance above that of the broader equity market. Their higher valuations have sparked concern that these funds are vulnerable to a sell-off.

Historically, high valuations of MSCI World Minimum Volatility Index have not resulted in periods of dramatic underperformance for the index.

Since the inception of the index in November 2012, periods when the index has had higher valuations have been followed by stronger performing, less volatile markets. The index has then participated in some of the upside of these stronger markets, but not all, just as one would expect.

The index has historically delivered less downside capture in negatively trending markets as well as less upside capture in positively trending markets.3 Over the long term, the primary investment outcome has been reduced risk.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Source: BlackRock, MSCI. Data as at 01/06/2008-31/12/2018. Bars represent forward three-year rolling periods. Thus, the bar dated 12/2012 represents the three-year rolling period ending 12/2015. P/E data is trailing. Index returns are for illustrative purposes only. Index performance returns do not reflect any management fees, transaction costs or expenses.

Myth 3: Minimum volatility strategies with heightened valuations won’t reduce risk

DISPELLING MYTH 3 – Minimum volatility strategies have reduced volatility regardless of valuations

Valuations of minimum volatility ETFs will rise and fall over time. On a price-to-earnings basis, current valuations of many minimum volatility strategies may appear high versus the overall equity market. The more important point, however, is that there has been no definitive relationship between the valuations of minimum volatility strategies and their ability to deliver lower risk. 

Over rolling three-year periods, the MSCI World Minimum Volatility Index delivered less risk than the market regardless of whether it carried a higher or lower valuation than the broader global equity market.4

Source: MSCI and BlackRock as at 31/12/2018. The chart measures the trailing P/E premium or discount of MSCI World Minimum Volatility Index to the market, as represented by the MSCI World Index. The chart also reflect the percentage difference between the 3- year, rolling annualised standard deviation of returns for the MSCI World Minimum Volatility Index versus the MSCI World Index. The “date” signifies the return period start date. Data presented beginning inception of the index (6/2008) and thus “investability”. Index returns are for illustrative purposes only. Index performance does not include any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.


 

1 Source: BlackRock, Bloomberg, Morningstar, Thomson Reuters. Percentages reflect average ownership in stock–level market capitalisation of the MSCI World. Data as of 31/12/2018.
2 “Crowding, Capacity, and Valuation in Minimum Volatility Strategies,” by Andrew Ang, Ananth Madhavan and Aleksander Sobczyk, 2016.
3 Source: BlackRock, MSCI. 
4 Source: MSCI as of 31/12/2018. Past performance does not guarantee future results.​

Risk Warnings

Investment in the products mentioned in this document may not be suitable for all investors. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. You may not get back the amount originally invested. The value of investments involving exposure to foreign currencies can be affected by exchange rate movements. We remind you that the levels and bases of, and reliefs from, taxation can change. BlackRock has not considered the suitability of this investment against your individual needs and risk tolerance. The data displayed provides summary information. Investment should be made on the basis of the relevant Prospectus which is available from the manager. In respect of the products mentioned this document is intended for information purposes only and does not constitute investment advice or an offer to sell or a solicitation of an offer to buy the securities described within. This document may not be distributed without authorisation from BlackRock Advisors (UK) Limited.

 

Regulatory Information

BlackRock Advisors (UK) Limited, which is authorised and regulated by the Financial Conduct Authority (‘FCA’), having its registered office at 12 Throgmorton Avenue, London, EC2N 2DL, England, Tel +44 (0)20 7743 3000, has issued this document for access by Professional Clients only and no other person should rely upon the information contained within it. For your protection, calls are usually recorded.

 

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