Amid today’s economic and political uncertainties, the financial markets are prone to bouts of unsettling volatility. Investors have turned to minimum volatility exchange traded funds (ETFs) to help weather the turbulence of the markets.Minimum volatility strategies account for 90 per cent of the 2019 YTD NNB in the EMEA Smart Beta segment (excluding dividend strategies). * Source BlackRock GBI, data as of 31/01/19Any popular investment will garner its sceptics, and minimum volatility ETFs are no exception. Here, we dispel three common myths associated with minimum volatility strategies. Myth 1: Minimum volatility strategies suffer from crowdingDISPELLING MYTH 1 – Minimum volatility strategies have ample capacitySome investors are concerned that the rising popularity of minimum volatility ETFs will create large flows into lower volatility stocks, and thereby, will reverse the dynamic that minimum volatility ETFs depend on.Taking a look at stock level ownership dispels crowding concerns about minimum volatilityETFs. The fraction of total market capitalisation held by minimum volatility strategies is unlikely to merit crowding concerns.Of the MSCI World’s total market cap of USD35.8 trillion, EMEA-domiciled exchange traded products collectively own 2.18 per cent of this. Furthermore, all EMEA-domiciled minimum volatility ETFs own a mere 0.02 per cent of the MSCI World’s stocks, implying that there is ample capacity remaining in minimum volatility strategies.1,2 Myth 2: Minimum volatility ETFs are vulnerable to a sell-offDISPELLING MYTH 2 – Minimum volatility ETFs are performing as intendedThe popularity of minimum volatility ETFs has boosted their valuations and their performance above that of the broader equity market. Their higher valuations have sparked concern that these funds are vulnerable to a sell-off.Historically, high valuations of MSCI World Minimum Volatility Index have not resulted in periods of dramatic underperformance for the index.Since the inception of the index in November 2012, periods when the index has had higher valuations have been followed by stronger performing, less volatile markets. The index has then participated in some of the upside of these stronger markets, but not all, just as one would expect.The index has historically delivered less downside capture in negatively trending markets as well as less upside capture in positively trending markets.3 Over the long term, the primary investment outcome has been reduced risk.Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.
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