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What is minimum volatility investing?
Minimum volatility investing aims to provide investors with a smoother ride within equity allocations by creating a portfolio that exhibits less swings — up or down — than the market.
iShares ETFs cover a broad range of asset classes, risk profiles and investment outcomes. To understand the appropriateness of this fund for your investment objective, please visit our product webpage.
Find out more about iShares Edge MSCI World Minimum Volatility ETF (WVOL)
https://www.blackrock.com/au/products/284667/
This product is likely to be appropriate for a consumer who is seeking capital growth, using the product for a major allocation of their portfolio or less, with a minimum investment timeframe of 5 years, and with a medium to high risk/return profile.
Key Takeaways
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Minimum Volatility investing seeks to reduce risk by investing in a portfolio of stocks that is less volatile than the broad market.
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Minimum Volatility investing has been around for decades and is backed by economic theory and real-world data.1
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Minimum Volatility strategies look at how stock prices change and interact with each other to build a portfolio that aims to have less risk than the broad market.
Why minimum volatility investing?
Imagine that you’re a hiker who has two potential paths to climb a mountain. One trail is very challenging. It’s steep, rocky, and has several parts where the path has sharp descents. While the trail is exhilarating, there is also the increased risk of injury or falling. Alternatively, there is a second trail that is more gradual and stable. While this trail may be less exciting, there is a much lower chance of getting injured or hurt.
In this analogy, a minimum volatility strategy would look more like the second trail — less risky and designed to be more stable. A min vol portfolio can help investors navigate the risks of big fluctuations in the market. Just as hikers can still reach the summit of the mountain on a less challenging trail, investors can still pursue their investment goals while seeking to avoid stomach churning volatility.
Min vol, like all our factor investing options, has a solid economic reason for its long history and has consistently reduced portfolio risk compared to the overall market. In fact, the MSCI World Minimum Volatility Index has had ~20% less volatility than the MSCI World Index since inception.2
Investors can use minimum volatility strategies to stabilise their portfolios and stay invested during market turmoil.
Historically, studies have shown that less volatile stocks have outperformed more volatile ones over time.3 There are a few theories as to why – for example, institutional investors may overweight more volatile companies to capture more equity premium and reach their return targets.
Alternatively, there may be groups of investors that are willing to overpay for riskier and more volatile companies for potential high returns. This combination of factors has meant that less volatile stocks are often underappreciated.
Our iShares minimum volatility ETF
Our approach to minimum volatility investing
BlackRock looks at individual stock volatility and correlations when evaluating a minimum volatility portfolio.4
Minimum volatility investing looks to build a portfolio with less risk than the broad market– not just a collection of less risky stocks.
Unlike the other factors we believe in at BlackRock, the main goal of minimum volatility is to reduce overall risk in portfolios. Investors can use minimum volatility ETFs such as the iShares Edge MSCI World Minimum Volatility ETF (WVOL) to help lower their overall level of risk and stay invested.
This means they can continue participating in equity rallies rather than pivoting to fixed income or cash.
Since inception in 2011, iShares Minimum Volatility ETFs have captured meaningful gains during upswings, and minimized losses during declines in U.S., international and emerging markets, shielding portfolios and allowing investors to stay invested through market cycles as per the table below.
The figures shown relate to simulated past performance. Simulated past performance is not a reliable indicator of current or future results. Source: BlackRock as of 30 November 2024. Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index. The value of an investment can fall as well as rise and investors may not get back the original amount invested. There is a risk that the entire amount invested may be lost. Past performance is not a reliable indicator of current or future results. BlackRock makes no representations or warranties as to the accuracy or completeness of any past, estimated or simulated performance results contained herein, and further nothing contained herein shall be relied upon as a promise by, or representation by BlackRock whether as to past or future performance results.
Minimum volatility in portfolios
The MSCI Minimum Volatility Indexes explicitly apply sector limits relative to the weights in their parent indexes at each rebalance.5 This constraint was purposely applied to help prevent unintended overweights to “safe haven” sectors. This sector-controlled approach makes minimum volatility attractive as a core position in a portfolio.
Source: MSCI as at 31 December 2024
As seen in the chart above, minimum volatility tends to naturally overweight the utilities and consumer staples sectors, but the sector caps play an important role in helping min vol seek to capture more upside if equity markets rally.
A focus on factor styles, such as minimum volatility, has historically provided better returns and/or less risk. Sectors, on the other hand, are a source of unrewarded, active risk in portfolios.
ETFs can give easy access to minimum volatility investing
Asset allocation and staying fully invested in equity markets are often two key drivers of portfolio performance. But time and time again, even the most disciplined investors abandon their plan as volatility rises and markets sell off.
Accessing minimum volatility through a low-cost ETF such as the iShares Edge MSCI World Minimum Volatility ETF (WVOL), seeks to mitigate risk and volatility in portfolios and allows investors to stick with their long-term plans and financial goals.
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Source: BlackRock as at 31 December 2024. Stock volatility - Standard deviation describes the variation of a set of returns away from the average (mean) return. Correlations - Factors include macro factors (e.g., country, industry, etc.), style factors (e.g., value, quality, momentum, etc.), as well as individual stock specific risk.