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ETF Specialist

Go Global With Low-Volatility Equities

IShares' global low-volatility ETF comes of age.

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A handful of monster trades over the past few months have pushed assets in  iShares MSCI All Country World Minimum Volatility (ACWV) from $30 million to almost $300 million, making it one of the quickest growing exchange-traded funds. And for good reason--it's a great strategy.

I've pounded the table for low-volatility equities in previous articles (but for nowhere near as long as some others have). The evidence is persuasive. Low-volatility stocks have performed about as well as their higher-volatility counterparts--much better, actually, in foreign markets--but, obviously, with lower volatility and smaller drawdowns. The phenomenon is robust to period and market, volatility measure (it can be measured by windows ranging from 30 days to three years), and other factors known to boost returns such as momentum and value. The strategy has produced superior risk-adjusted performances in Treasuries, corporates, and futures. Academics have known since at least the '70s that high-beta stocks (which are practically equivalent to high-volatility stocks) didn't offer returns commensurate with CAPM's predictions. Amazingly, most investors and researchers ignored this property of financial time series until recently.

So, what makes ACWV in particular compelling? Well, the biggest low-volatility equity fund,  PowerShares S&P 500 Low Volatility (SPLV), only applies the strategy to U.S. stocks. While we like SPLV, low-volatility strategies have produced higher excess returns in more-volatile, more-heterogeneous, and, presumably, less-efficient foreign markets. If investors are impressed by the mountain of historical evidence attesting to the low-volatility anomaly's existence, it makes little sense to only apply the strategy in the market where it is expected to help the least. That is why ACWV's recent spurt of asset growth is good news. Investors can now buy a global low-volatility equity strategy without worrying about untimely liquidation.

Samuel Lee does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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