Staying invested with minimum volatility ETFs

KEY TAKEAWAYS

• Minimum volatility ETFs can help investors during periods of heightened volatility and geopolitical uncertainty.
• Negative returns can have dramatic effects on portfolio performance. Attempting to reduce downside risk can result in more favorable returns over the long term.
• Minimum Volatility has not only had strong relative performance YTD, but it has also reduced portfolio volatility over the long run.

Paul “Bear” Bryant, the legendary football coach of the Alabama Crimson Tide, once said “offense wins games…defense wins championships.” That sentiment can be also applied to investing, where limiting downside risk of a portfolio can be just as important, if not more so, than maximizing upside potential. Given the current backdrop of heightened volatility and geopolitical uncertainty, it is critical that investors appropriately consider how to manage investment risk and properly diversify their portfolios. The iShares minimum volatility suite represents a set of tools that investors can use to help reduce volatility and mitigate downside capture with the goal of staying invested in equity markets when markets get bumpy.

TIME IN THE MARKET, NOT TIMING THE MARKET

An important factor when determining whether an investor achieves their desired outcomes is their ability to stay invested over the long term. This can be challenging, as investors are often tempted into buying equities in periods of strong performance, only to sell those same securities when performance becomes challenged. The benefit of staying invested through turbulent market cycles is illustrated in the graph below, which shows that missing out on the market’s top returning days can have a dramatic impact on a portfolio’s ending value.

In short, since trying to time the market is extremely difficult staying the course and remaining invested may be prudent. Having said that, many investors would most likely prefer to lessen the pain of a market crash. One potential solution for investors is to focus on the stocks that tend to not climb as high or fall as low as other stocks, known as minimum volatility investing. These strategies can help mitigate the inherent behavioral bias of trying to time the market by pursuing consistent returns during both up markets and down markets – giving investors more confidence in maintaining their equity positions during market uncertainty.

MANAGING DOWNSIDE RISK

Investors who can tolerate market swings can benefit from managing a portfolio’s downside risk, as negative returns can have an outsized impact on performance. For example, suppose that the market falls by 50% and then rebounds, rising by 50%. In this scenario, an investor may intuitively think that they’ve broken even, while their portfolio is actually down -25%. In reality, the investor would need a 100% return to break even from a 50% drop.