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In times of high inflation such as the current one (8.5% in the US), which is supported by rising energy and commodity prices, it is naturally more reassuring to look for candidates that can withstand these price increases without seeing their performance reduced, at the risk of standing on only one leg. The MSCI World Minimum Volatility Index has lower volatility characteristics than the broader developed equity markets.
The MSCI World Minimum Volatility Index outperforms its big brother the MSCI World Index during times of crisis. In 2008, it achieved a -29% decline versus -40% for the MSCI World. In 2018, it made -1.4% against -8.2% for its big brother. It therefore allows for a diversified investment in equities to benefit from the long-term compound returns of the MSCI World while limiting the downside risk of the most volatile stocks.
‘Quality’ companies
This index is a subset of stocks from the MSCI World (23 most developed countries), selected for their quality financials and stable results. The selection is based on three criteria:
The index adopts a factor bias by favoring low volatility (its primary objective), yielding, qualitative and large-cap stocks. This creaming results in a total of 288 quality companies that provide above-average earnings security, making them - theoretically - less susceptible to multiple market shocks. One only has to look at the top ten positions to understand the robustness of this index in downturns.
⦁ a high return on equity (ROE)
⦁ stable growth over the last few years
⦁ low financial leverage (debt/EBITDA)
Rather than selecting the best companies from all sectors, the MSCI World Minimum Volatility Index is composed of the best companies from each of the eleven sectors listed (Health Care, Information Technology, Consumer Staples, Communication Services, Industrials, Financials, Utilities, Consumer Discretionary, Materials, Real Estate, Energy). In addition, the top three sectors in the index (Health Care, Information Technology and Consumer Staples) represent 47.74%.
Many ETFs replicating this strategy exist but the most relevant in my opinion by its assets under management and the reliability of its issuer is the iShares Edge MSCI World Minimum Volatility UCITS ETF (MVOL) from BlackRock. With $4.2 billion in assets under management, a contained management fee of 0.30%, and a track record since 2012, it makes an interesting candidate for anyone looking for a low volatility world ETF. And, over the past nine years, this ETF has a CAGR of 10.82%.
