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This Medalist ETF Takes a Low-Risk Approach to the Global Market

A smoother ride is possible.

Global stock funds hold a certain appeal for investors who want to reduce their portfolio’s complexity while maintaining diversification across multiple global regions. Combining a broad portfolio with a minimum-volatility strategy should help reduce risk and smooth out returns relative to a cap-weighted benchmark. Throw in a low expense ratio and the result is a compelling, all-in-one fund for long-term investors. IShares Edge MSCI Minimum Volatility Global ETF’s ACWV proven ability to cut back on risk and provide better risk-adjusted performance than a market-cap-weighted index earns a Morningstar Analyst Rating of Silver.

The fund tracks the MSCI All Country World Index Minimum Volatility. It uses an optimizer to select and weight stocks from the MSCI All Country World Index in a way that minimizes expected volatility. It looks for names with low levels of expected volatility, but it also considers how stocks behave relative to one another. Therefore, it can own volatile stocks if their low correlations are expected to reduce the portfolio's overall volatility.

This strategy also uses constraints to promote diversification. It limits individual stocks to 1.5% of the portfolio while country and sector weights are held within 5% of their weight in the parent index. Turnover also gets capped at 10% during each semiannual rebalance to mitigate trading costs. The portfolio holds less than one third of the stocks in its parent index, but it still diversifies stock-specific risk with only 13% of its assets in its 10 largest names.

Low-risk strategies are attractive because they can provide a smoother ride than a market index. The fund should lag the MSCI ACWI during rallies but hold up better when the market declines. This should outweigh the upside it sacrifices in bull markets and lead to better risk-adjusted performance over the long haul. Behavioral biases may also cause defensive stocks to become undervalued, setting up attractive risk-adjusted performance.

This strategy has worked well. The fund's volatility was 26% lower than the MSCI ACWI from its launch in October 2011 through June 2020. And its total return mildly beat the benchmark by 14 basis points annually over that period. The fund's low 0.20% expense ratio is another benefit that should provide a durable advantage.

Process This strategy's holistic approach maintains diversification while effectively cutting back on risk, which leads to better risk-adjusted performance than a market-cap-weighted benchmark. It earns an Above Average Process Pillar rating.

BlackRock's portfolio managers use full replication to track the MSCI ACWI Minimum Volatility. This strategy starts with all stocks in the MSCI ACWI. It uses the Barra Equity Model to estimate the volatility of each stock and their expected future relationship with each other based on factor exposures. This information is fed into an optimizer that attempts to construct the least volatile portfolio while enforcing several constraints. It holds country and sector weights to within 5% of their weight in the parent index, while the weight of individual stocks is held to 0.05%-1.5% of the portfolio. The model also overweights more-recent data, which should be more predictive of future behavior than older, stale numbers. The strategy limits one-way turnover to 10% at each rebalance, which promotes lower trading costs. The index reconstitutes semiannually in May and November.

Portfolio This well-diversified portfolio holds almost 400 stocks, while only 13% of its assets are dedicated to its 10 largest names. The fund tilts toward stocks with historically low volatility based on the premise that recent volatility tends to persist in the short term. The sector composition of this fund can change slightly as certain segments become more or less risky. It has modestly tilted toward the utilities and consumer staples sectors while underweighting the more volatile basic materials and energy sectors.

Focusing on stable companies tends to steer the portfolio toward profitable firms. From time to time, volatile names like Newmont NEM have occasionally found their way into this fund when they have low expected correlations with other holdings. Under such circumstances, the combination of high volatility and low correlation can help reduce the overall portfolio's volatility.

This strategy does not hedge its foreign-exchange risk, so it has exposure to several foreign currencies, including the euro, yen, and pound. Changes in foreign-exchange rates between these currencies and the U.S. dollar can add to the fund's volatility, but they do not undermine its low-risk objective.

People Industry-leading technology and BlackRock's global footprint support a strong team of portfolio managers, earning an Above Average People Pillar rating. The team employs BlackRock's Aladdin platform to fulfill much of its portfolio management tasks, and global trading desks allow traders to conduct foreign transactions in a cost-effective manner.

Alan Mason is head of portfolio management for the Americas and helps manage this portfolio. He is the longest-tenured member of the team and has served as a portfolio manager at the firm since 1991. The fund's other four managers all share oversight for BlackRock's exchange-traded funds, with each focusing on a specific asset class. Greg Savage deals with BlackRock's multi-asset strategies, and Jennifer Hsui monitors emerging-markets funds. Rachel Aguirre has responsibility for BlackRock’s institutional developed markets and U.S. funds, while Amy Whitelaw oversees North America and Latin America ETFs for the firm.

These managers interact with a wider team of traders and managers around the globe to execute the fund's day-to-day operations. The larger number of managers also limits the impact of personnel turnover when it does occur. A portion of their compensation is tethered to index-tracking performance, which aligns their interests with those of the fund's investors.

Performance This strategy has delivered on its low-risk objective. Its volatility was 26% lower than the MSCI ACWI from its launch in October 2011 through June 2020. The fund's total return managed to modestly beat the benchmark, outperforming the MSCI ACWI ex USA by 14 basis points annually over the same period. Its longest streak of outperformance occurred between January 2014 and June 2016. Underweighting cyclical sectors, like materials and energy, helped the fund outperform the index during this period, while stock selection also contributed to its outperformance.

Foreign markets have not performed well over the past decade by historical standards and roughly half of the portfolio is dedicated to overseas names. However, the fund's preference for defensive stocks has tempered its downside and can help smooth its performance over the course of a market cycle. Its drawdowns have been shallower than the MSCI ACWI, but it tends to underperform when the market rallies. Between November 2011 and June 2020, the portfolio captured 47% of the benchmark's downside but realized 69% of its upside, which is an attractive trade-off. The fund also held up better than the index during the coronavirus-driven sell-off in the first quarter of 2020, beating it by 5.4 percentage points over those three months.

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