2 Funds That Dial Down the Risk

Rapidly evolving artificial intelligence technology has driven sharp moves across AI-related stocks. As a result, many traditional, steady stocks have struggled to keep pace.

Over the trailing 12 months through September 2026, for instance, the Morningstar US Low Volatility Factor Index’s 2.2% decline badly trailed the Morningstar US Market Index’s 15.3% rise. Morningstar’s Risk model also shows that volatility was among the best-performing factors over that stretch.

Despite the underwhelming results, contrarian investors can benefit from owning funds that target steadier companies once the market’s enthusiasm cools. Two funds deliberately target the stable and proven businesses that tend to be left behind during sharp market rallies.

Vanguard Global Minimum Volatility VMNVX, which earns a Morningstar Medalist Rating of Gold, uses a well-constructed approach that has powered compelling, long-term risk-adjusted returns. The Vanguard Quantitative Equity Group behind this strategy uses an optimizer to create a portfolio of 180–320 stocks. The optimizer selects and weights stocks from the FTSE Global All Cap Hedged Index based on both the volatility of their past returns (with recent data weighted more heavily) and how that performance relates to other potential holdings.

The team runs the optimizer every day but trades only when it feels the scales tip in its favor (usually once every four to six weeks). Plus, the managers fully hedge currency risk with one-month forward contracts, which should help further reduce volatility. The result is a portfolio filled with mature franchises that may lack the upside of some flashier peers but absorb market turbulence well. Indeed, the fund’s returns ranked in the bottom decile in the global large-stock blend Morningstar Category in sharp rallies such as in 2020 and again in 2023.

However, the fund has had a penchant for making up ground during turbulent times. From its late 2013 inception through September 2026, the Admiral shares captured just 64% of the benchmark’s returns during down markets. For instance, when tech stocks sold off and the index fell 21.3% peak to trough from Jan. 4, 2022, through Sept. 30, 2022, the fund fell a much more manageable 12.8%.

Silver-rated iShares MSCI USA Min Vol Factor ETF USMV is another fund that targets low-volatility stocks. The exchange-traded fund tracks the MSCI USA Minimum Volatility Index, which pulls constituents from the MSCI USA Index. This benchmark uses the Barra equity model to estimate stocks’ volatility and considers their performance relative to other potential index constituents, which tends to better predict future risk. Rather than targeting a specific volatility level, the optimizer aims to construct the least volatile portfolio within a set of constraints. Optimization is somewhat of a black box, but it suits the strategy’s holistic approach and allows it to juggle an array of constraints, such as limiting turnover to 5% at each quarterly rebalance.

The fund holds between 115 and 215 stocks, and top-10 holdings tend to soak up just 15% of the portfolio’s assets, on average, which mitigates single-stock and portfolio risks well.

Like the Vanguard fund, this portfolio is not built to shine in rising markets, but it has made up for it in choppier periods. It, too, had relatively weak results compared with its large-blend category peers in 2020, 2021, and 2023 but held up well in the 2022 market selloff. So, while investors had to stomach bottom-decile returns in 2025 and through the first nine months of 2026, those who stick with this strategy should be rewarded.

This article first appeared in the September 2026 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting this website.