My colleague and fellow iShares blogger Daniel Morillo has talked about the low risk anomaly in the past. Basically, this anomaly leads to the idea that from a performance measurement standpoint, minimum volatility indexes have captured a greater percentage of the upside than they have on the downside. For example, based on the monthly index returns in the third chart, the min vol index captured about 77% of the upside of the market, yet only captured about 61% of the downside. Furthermore, it did so with roughly 25% less risk than the S&P 500 (measured by standard deviation).
And this is why I like the “bowling with bumpers” analogy. Minimum volatility indexes seek to minimize the effects of the occasional gutter ball, allowing investors to focus more on their long-term investment objectives – the pins at the end of the alley.
Market Realist – The graph above compares the monthly returns of the S&P 500 (SPY)(IVV) with the iShares MSCI Minimum Volatility ETF (USMV) since October 2012. When S&P 500 falls, the minimum volatility fund usually falls less, providing more protection to its investors. On the other hand, when the S&P 500 rises, the minimum volatility fund sometimes even beats the monthly performances of the S&P 500.