Defensive stock funds provide a way to invest in stocks while incurring less risk than a cap-weighted index. Less risk means a smoother ride, and these strategies should hold up better during market downturns. IShares Edge MSCI Min Vol EAFE ETF (EFAV) is a compelling, low-cost exchange-traded fund that captures these traits and takes additional measures to promote diversification and limit turnover. It is suitable as a core holding and earns a Morningstar Analyst Rating of Silver.
The fund tracks the MSCI EAFE Minimum Volatility Index. Its construction process starts with all stocks in the MSCI EAFE Index, and it uses an optimizer to select and weight stocks in a way that minimizes the portfolio's expected volatility while honoring several constraints. It limits individual stock weightings to 1.5% of the portfolio and holds country and sector weightings to 5% of the parent index weighting. These constraints promote diversification while controlling active risk but can limit the fund's style purity. It also imposes turnover limits to rein in trading costs. The final portfolio holds less than 30% of the stocks in its parent index, but it is still well-diversified.
Daniel Sotiroff does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.