Defensive strategies provide a way to invest in stocks while incurring less risk than a cap-weighted index. Less risk means a smoother ride, and these types of funds should hold up better during market downturns. IShares Edge MSCI Min Vol EAFE ETF (EFAV) is an appealing, low-cost fund that captures these characteristics. It takes additional measures to promote diversification and limit turnover, meaning it could be used as a core holding. EFAV’s integrated approach to portfolio construction and proven ability to cut back on risk earn a Morningstar Analyst Rating of Silver.
The management team at BlackRock uses full replication to track the MSCI EAFE Minimum Volatility Index. The strategy uses an optimizer that selects and weights stocks from the MSCI EAFE Index in a way that minimizes expected volatility. This integrated approach looks for names with low levels of expected volatility, but it also considers how they behave relative to one another. Therefore, it can own volatile stocks if their low correlations are expected to reduce the portfolio’s overall volatility.
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Daniel Sotiroff does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.