IShares MSCI USA Minimum Volatility Factor ETF USMV is a well-crafted low-volatility fund that has proved its mettle in bear markets. It offers downside protection that should continue to breed a more attractive risk/reward profile than the Russell 1000 Index, meriting a Morningstar Medalist Rating of Silver. 

The MSCI USA Minimum Volatility Index, which this fund fully replicates, whittles a defensive portfolio out of the MSCI USA Index, a broad benchmark that covers the mid- and large-cap U.S. stock market. An optimizer builds the portfolio, considering stocks’ individual volatility as well as how their performance interrelates with other holdings. That blueprint favors sturdy firms like Berkshire Hathaway BRK.B and Pepsi PEP, but it also admits some more erratic stocks that zig when the other holdings zag. For instance, Newmont’s NEM volatile but unique performance patterns earn it 10 times the weight here than in the Russell 1000 Index.

Comprehensive portfolio constraints protect the fund from incidental risks and keep it diversified. The fund moors its stock and sector allocations to its 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 portfolio. Controlling for risk factors like value prevents unintended style or factor bets. The fund also limits one-way turnover to 10% at each semiannual rebalance and faces few transaction costs as a result.

This holistic tack has proven its efficacy. The fund’s returns were about 18% less volatile than the parent index from its October 2011 inception through May 2023. Predictably, it has lagged when stocks rally but outperformed when they sour: The fund ranked in the large-blend Morningstar Category’s top decile in 2018 and 2022, the two years since inception the Russell 1000 Index lost value. Investors shouldn’t treat this fund as a bear-market panacea, but its risk/reward profile should measure up well over the long term.

Analyst Rating

Well designed.

Analyst

Ryan Jackson

Broadcom

UnitedHealth Group

Roper Technologies

Republic Services

T-Mobile US

Motorola Solutions

Microsoft

Cisco Systems

Waste Management

Assessing volatility at the portfolio level and honoring a series of constraints positions this well-diversified fund to deliver on its low-volatility objective. It warrants an Above Average Process Pillar rating.

The MSCI USA Minimum Volatility Index pulls constituents from the broad, market-cap-weighted MSCI USA Index. 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 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 fund to balance its diversified low-volatility objective.

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 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.

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.

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 USA ETF

USMV tracks an index of US-listed firms selected and weighted to create a low-volatility portfolio subject to various constraints.

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The iShares MSCI USA Min Vol Factor ETF seeks to track an index of U.S. equities with lower volatility characteristics than the broad market. USMV has a low management fee and has delivered very strong historical risk adjusted performance. USMV's investment approach appears to focus on overweighting more defensive sectors as well as overweighting more defensive stocks within each sector.

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I suggest reducing exposure to high-beta stocks and investing in a low-volatility ETF to protect against potential market downturns. USMV has held up better than the SPY during all three of the market's major pullbacks since its inception. I recommend investing in USMV which has lower volatility and more diversified holdings.

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