IShares MSCI Global Minimum Volatility Factor ETF ACWV and iShares MSCI Minimum Volatility Global Index ETF XMW are well-crafted low-volatility funds that have proven their mettle in bear markets. They offer downside protection that should continue to breed a more attractive risk/reward profile than the broad global market, meriting Morningstar Medalist Ratings of Silver. 

The MSCI ACWI Minimum Volatility Index, which these index strategies track, whittles a defensive portfolio out of the MSCI All Country World Index, a broad benchmark that covers the mid- and large-cap global stock market. An optimizer builds the portfolios, considering stocks’ individual volatility as well as how their performance interrelates with other holdings. That blueprint favors sturdy firms like Johnson & Johnson and Pepsi, but it also admits some more erratic stocks that zig when the other holdings zag. For instance, biotechnology firm Seagen’s volatile but unique performance patterns earned it more than 10 times the weight here than in the MSCI ACWI as of May 2023.

Comprehensive portfolio constraints protect the funds from incidental risks and keep them diversified. The funds moor their stock and sector allocations to the parent index, which reduces firm-specific risk and ensures that consumer staples and utilities stocks—favorites among unconstrained low-volatility strategies—don’t dominate the portfolios. Controlling for risk factors like value prevents unintended style or factor bets. The funds also limit one-way turnover to 10% at each semiannual rebalance and face few transaction costs as a result.

This holistic tack has proved its efficacy. The underlying index’s returns were nearly 30% less volatile than the parent index from the U.S.-domiciled fund’s October 2011 inception through May 2023. Predictably, the index has trailed when stocks rally but outperformed when they sour: It handily outperformed its parent index in 2018 and 2022, the last two calendar years the MSCI ACWI lost value. Investors shouldn’t treat these strategies as bear-market panaceas, but their risk/reward profile should measure up well over the long term.

Analyst Rating

A well designed low-volatility fund.

Analyst

Ryan Jackson

Merck

Waste Management

Motorola Solutions

Cisco Systems

Roper Technologies

Walmart

T-Mobile US

Republic Services

McKesson

PepsiCo

Assessing volatility at the portfolio level and honoring a series of constraints positions these well-diversified funds to deliver on their low-volatility objectives. They earn Above Average Process Pillar ratings.

The MSCI ACWI Minimum Volatility Index pulls constituents from the broad, cap-weighted MSCI ACWI. This benchmark uses the Barra equity model to estimate stocks' volatility and their covariance with other potential index constituents. The model emphasizes more-recent data because it tends to be more predictive of future risk. An optimizer absorbs this information and churns out the lowest-risk portfolio it can, subject to several constraints.

These restrictions hold sector and country weights to within 5 percentage points of their parent index allocation. Stocks cannot exceed their parent index weight by 1.5 percentage points or 20 times, whichever is lower. The index also limits one-way turnover to 10% at each semiannual rebalance and controls exposure to nontargeted risk factors to prevent an incidental value or growth bias. 

Rather than target a specific volatility level, the optimizer aims to construct the lowest-risk portfolio it can within the boundaries of the constraints. Constructing a portfolio with an optimizer is a somewhat opaque approach, but it allows the funds to balance their diversification requirements and low-volatility objectives.

Above Average

Process

BlackRock's industry-leading technology, global footprint, and extensive supporting cast earn 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 way.

The U.S.-based iShares index equity team has endured some internal turnover at the top over the past few years. But index-tracking performance should remain tight, thanks to heavily automated processes, a large team of seasoned professionals, and several long-tenured managers who remain at the helm. Amy Whitelaw left the team in February 2023 for another role within the organization. Paul Whitehead replaced Alan Mason as a manager in January 2022, when Mason left to focus on the firm's customized institutional indexing capabilities. The broader index equity group, co-headed by Jennifer Hsui and Paul Whitehead, will continue to oversee iShares equity ETFs.

The index portfolio management team that reported to Amy Whitelaw continues to oversee the Canadian-domiciled strategy. Her departure should have little impact on the fund’s day-to-day management given the automated processes and sprawling resources in place. 

All managers interact with a wider team of traders and managers around the globe to execute the funds’ day-to-day operations. The larger number of managers also limits the impact of personnel turnover when it does occur.

People

BlackRock offers compelling options across asset classes and vehicles. It earns an Above Average rating for Parent. 
The firm’s approximately USD 8 trillion in assets under management, as of Sept. 30, 2022, gives it unparalleled scale and influence. It is a market-leading index fund provider globally, and its iShares exchange-traded fund franchise offers a low-cost lineup of core funds that investors can use to build a well-diversified portfolio for dirt cheap. The firm can be more adventurous in its ETF launches than some peers, so not everything it launches is appropriate for the masses. As a result, it is likely to have more ETF closures than peers that stick to the basic building blocks.  
The firm’s active fixed-income and multi-asset efforts also stand out as some of the best in the industry. Those benefit from BlackRock’s commitment to building a first-class risk management system via its Aladdin analytics software. The software is also available for sale to other firms and has proved to be a popular option for competitors, a testament to its usefulness. 
More recently, the firm has shifted its focus to ESG offerings and incorporating ESG across its investment lineup, leading to a political backlash in the United States.
BlackRock isn’t the best at everything it tries to do, but retail investors, financial advisors, and large institutions could all build robust portfolios using BlackRock’s products.

Parent

iShares Edge MSCI Min Vol Global ETF

ACWV tracks an index of large- and mid-cap global stocks selected and weighted to create a low volatility portfolio.

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