Minimum volatility funds help reduce your portfolio’s gutter balls

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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.

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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.

Please read Market Realist’s Valuations and volatility: 2 key lessons from last week’s sell-off to learn more about volatility (VXX)(XIV).

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