GLOBAL STOCK MARKETS continue to climb to fresh highs as investors are upbeat on the improving growth outlooks in the United States, China, and much of the rest of the world. However, a number of investors have begun to be cautious on how much further the markets can rise and shift towards low volatility portfolios. Market valuations are at the higher end of a historical range.
Assuming that market corrections will begin, investors will rush into a defensive strategy, as they have done in every market down-cycle. We believe it might be a good time for risk-averse investors to think about getting into low-volatility stocks in an effort to limit the downside while capturing a significant portion of the upside.
One choice for overseas investment exposure might by iShares Edge Minimum Volatility exchange-traded funds. According to statistics provided by BlackRock, these minimum-volatility ETFs capture a large part of the market gains while the downsides are significantly lower. For instance, the iShares Edge MSCI Min Vol USA ETF (USMV) invests in 185 stocks with low volatility such as AT&T, Johnson & Johnson, McDonald’s Corp, and Procter & Gamble.
When the market was down, the ETF lost only 49 per cent of the broad market. On market gains, the portfolio captured as much as 78 per cent of the gains. The statistics could deviate from these numbers in the short term but should not be significantly off track in the longer term. The ETF has an expense ratio of only 0.15 per cent, considerably lower than traditional mutual funds.