Minimum volatility funds help reduce your portfolio’s gutter balls



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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