CAPE TOWN – Low volatility investing has steadily gained in popularity in the last few years. There has been a growing appreciation that it is possible to earn market-related returns from a passive product without having to take on all of the market volatility.
It isn’t actually news that low volatility stocks out-perform the market on a risk-adjusted basis. This has been established in academic literature for decades.
The recent popularity of this investing style has however predominantly been due to a shift away from fixed income instruments. In the past, investors looking to reduce risk would look to bonds, but since the financial crisis yields have been so low that they have been looking for alternatives.
Investors have been forced into riskier assets like equities, but still want to find ways to manage that risk. And that’s what low volatility index trackers can offer.
Essentially, they hold more defensive, ‘boring’ stocks that are rarely in the news and are not the primary targets of day traders. They are businesses that are generally in less cyclical industries and therefore show more consistent earnings.
For a South African investor wanting to access this theme in the US market, it is possible to trade the iShares MSCI USA Minimum Volatility ETF through the Standard Bank WebTrader platform. The fund holds a broad portfolio of 158 stocks listed in the US, chosen for their low volatility characteristics.
As it is well-known for its defensive qualities, it shouldn’t be surprising that healthcare is the sector with the largest weighting in the portfolio at 19.53%. Financials make up 15.54% of the fund, IT 14.66% and 14.48%.
Amongst the top ten holdings, one doesn’t find the likes of Apple or Exxon Mobil, but rather medical technology company Becton Dickinson, semiconductor company Qualcomm, consumer goods giant Proctor & Gamble, and retailer Walmart.
Investors might consider that the fund does currently look a little pricey at a price-to-earnings ratio of more than 21 times. Its dividend yield is just 1.8%.
However, with volatility returning it may present a less risky way to enter the US market. Over the last year the ETF showed a return of close to 19%.
** This is a sponsored education series focused on offshore investing. The content is sponsored by Standard Bank Webtrader and Moneyweb are the content creator.