Smart Beta Case Study: Seek reduced portfolio volatility

Capital at risk. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed.

Minimum volatility strategies can be used to potentially reduce portfolio volatility.
Here, we explain how.

Regardless of the market environment, achieving financial goals can be challenging. Today, with increased technological advances and the proliferation of index investing, we are seeing a new wave of products come to the fore: smart beta strategies.

Despite industry growth a key question frequently posed by investors is: how do I use these in my client's portfolio? Here, we explore a case study from the Smart Beta Guide that shows how an investment advisor used smart beta to complement a portfolio of active funds and reduce overall volatility.

This case study is provided for illustrative purposes only. The strategies discussed are strictly for educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

The iShares Minimum Volatility ETFs should not be considered low risk in absolute terms and may not be suitable for cautious investors. 

Investor Challenge:

  • An independent advisor had an equity portfolio, consisting of three actively managed funds, which historically produced excess returns to the benchmark over the long-term. However, large performance peaks and troughs over the short term were too dramatic for the client, and the advisor was getting pressure from the clients to sell the active funds.

Potential Solution:

  • With the help from a smart beta provider, the advisor used risk analytics to analyse the portfolio and paired this with a minimum volatility smart beta strategy.
  • The hypothetical performance below demonstrates that the portfolio that uses a combination minimum volatility strategy and actively managed funds demonstrates less dramatic peaks and troughs than the actively managed funds alone.



One Year Returns (%)

Actively managed portfolio

Actively managed portfolio combined with minimum volatility strategy 

2004

11.3

8.2

2005

6.2

5.5

2006

5.1

3.6

2007

1.5

0.6

2008

-1.2

0.4

2009

2.9

3.1

2010

14.8

10.3

2011

-5.8

-3.7

2012

-4.0

-1.6

2013

7.1

4.5

2014

-1.8

-2.6

2015

-7.5

-4.6

2016

-6.5

-3.6


Source: Morningstar as at 31 March 2017. This analysis is based on back-tested index data. Index returns are for illustrative purposes Index data are for illustrative purposes only and do not represent actual iShares Fund performance. Indexes are unmanaged and one cannot invest directly in an index. Performance returns do not reflect any management fees, transaction costs or expenses. Case study is provided for illustrative purposes only. The strategies discussed are strictly for educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

The figures shown relate to past performance. Past Performance is not a reliable indicator of future results and should not be the sole factor of consideration when selecting a product or strategy.

There can be no assurance that performance will be enhanced or risk will be reduced for funds that seek to provide exposure to certain quantitative investment characteristics ("factors"). Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods. In such circumstances, a fund may seek to maintain exposure to the targeted investment factors and not adjust to target different factors, which could result in losses.

Investor Toolkit- Minimum Volatility ETFs: What are they?

Smart Beta strategies that target stocks with low exposure to the volatility factor can be used with the aim of reducing risk in a portfolio. Minimum volatility strategies have historically delivered returns similar to the broad market benchmark, but with lower levels risk over the longer term.1

1 Source: MSCI, Bloomberg, BlackRock as at 30th September 2017