Whenever global equity market volatility hits, we like to look at the “Min Vol” investment strategy to see how it fares. The opportunities for such an analysis have been rare over the last few months, but we have an opening now so let’s take it.
As our proxy for Min Vol funds we’ll use the 5 largest US-listed exchange traded funds using the approach, which conveniently covers US, EAFE and Emerging Market equities:
- USMV ($38 billion in assets under management): iShares US equity product
- EFAV ($13 billion): iShares EAFE product
- SPLV ($12 billion): Invesco S&P 500-focused product
- ACWV ($6 billion): iShares All-Country/Global product
- EEMV ($5 billion): iShares Emerging Market product
First, here is how each has done relative to the relevant broad market index for 2020 year-to-date, which includes both the melt up in early January and last week’s downdraft:
- USMV is beating the S&P 500 YTD, +3.2% vs. +1.4%.
- SPLV, the other US equity Min Vol product, is also besting the S&P 500 YTD: +3.0% vs. 1.4%.
- EFAV, +0.5% YTD, is doing better than the MSCI EAFE Index’s 1.1% YTD decline.
- ACWV is up 2.1% YTD, better than the MSCI All-World Index’s 0.3% YTD return.
- EEMV is down 2.8% YTD, but that’s still better than the MSCI Emerging Markets Index -3.2% YTD return.
Bottom line: the Min Vol investing style is working across all major geographic regions thus far in 2020.
Second, how did these funds do in the recent market pullback, which started on January 20th?
- The S&P 500 is down 1.6% since the January 17th close.
USMV is +0.4% since then. SPLV is 0.6% higher.
- The MSCI EAFE Index is 2.4% lower than the January 17th close.
EFAV is down less, -1.1%.
- The MSCI All-World Index is 2.2% lower than the 17th’s close.
ACWV is only off 0.4%.
- The MSCI Emerging Markets Index is down 6.1% since the 17th.
EEMV is down less, -4.3%.
Bottom line: the Min Vol strategy did work to limit losses to anywhere from zero (average of US funds) to at worst 70% of last week’s/this week’s downturn (Emerging Markets).
Third – and last – let’s look at where the Min Vol strategy varies from the benchmarks to understand how it has delivered this recent performance. (Data courtesy of www.xtf.com)
- USMV overweights Utilities (8%) and Real Estate (9%) while underweighting Tech (18%) and Energy (2%).
- SPLV takes positioning a large step further: Utilities (28%), Real Estate (19%), Tech (5%) and Energy (2%).
- EFAV overweights Consumer Staples (17%) and Communications (10%).
- ACWV follows the playbook of overweighting Real Estate (8%) and Utilities (8%) and underweighting Tech (11%) and Energy (1%).
- EEMV takes a different track, overweighting Financials (26%), but also underweights Tech (10%) and Energy. At a country level, it underweights China (25%) and South Korea (6%) but overweights Taiwan (16%) and India (7%).
Bottom line: the Min Vol strategy favors stocks with below-average historical price volatility, and these tend to be linked to companies with stable businesses and free cash flows/dividends. That makes it yield sensitive, which is why this approach has done so well in 2020. In that respect Min Vol is not a magic bullet; if rates were to rise suddenly, it might well underperform.
Final thought: even with this strong performance out of the gate in 2020, the 5 funds we’ve highlighted here have lost $192 million in assets from redemptions (and $35 million in the last week). Total equity ETF flows have been strong (+$26 billion YTD, $4 billion in just the last week), so that’s a strange development. The big money flow winners YTD have been plain vanilla US, EAFE and Emerging Market funds along with ESG and sector products.
We’ll cover January’s money flows more completely in a few days, but the lesson is clear: Min Vol may be working, but investors still favor “Full Vol” products. That may change if recent volatility continues, of course. But it does show that equity investor confidence started the year on an up note and even recent events have not yet damaged that.