An ETF Hoping For A Low Volatility Three-Peat

Low volatility was the best-performing investment factor in 2018 and repeated that feat in 2019. Investors in the iShares Edge MSCI Min Vol USA ETF USMV are hoping a three-peat in 2020.

What Happened

USMV, the largest reduced volatility exchange traded fund in the U.S., did its job on multiple fronts last year. Though the fund lagged the S&P 500 by 350 basis points, it still gained 27.7% on the year while delivering 290 basis points less volatility. Additionally, investors added $12.5 billion to the iShares fund, a total surpassed by just two other ETFs.

“The fund’s 27% gain this year (2019) has likely helped spur interest, but we think the ability to gain lower-risk access to large-cap equities was appealing to many that were concerned that the Bull ride would not be a smooth one,” CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth wrote in a note out Thursday.

Rosenbluth has USMV pegged as CFRA's “focus ETF” for the month of January.

Why It's Important

While many forecasters expect the S&P 500 to notch another annual gain this year, prevailing wisdom indicates upside be more subdued compared to 2019, a scenario that could benefit low volatility ETFs such as USMV.

“However, looking to 2020, CFRA's Investment Policy Committee has established a year-end 2020 price target for the S&P 500 of 3435, implying a 6.5% price gain over the closing level of December 23,” said Rosenbluth. “This reflects CFRA equity analysts' target price differential for all stocks in the S&P 500; historical precedent, such as annual returns during presidential election cycle years; earnings and inflation estimates as well as technical trends. Given a lower expected return, we think investors will continue to focus on ways to reduce their equity risk profile and USMV is built to do just that.”

USMV, which follows the MSCI USA Minimum Volatility (USD) Index, allocates almost 28% of its combined weight to lower beta financial services and consumer staples names, but the technology sector at almost 18% is the fund's largest sector exposure.

What's Next

There are reasons investors have been flocking to USMV.

“Beyond the fund’s holdings, USMV is appealing to CFRA for other reasons,” adds Rosenbluth. “The ETF charges a modest 0.15% net expense ratio, trades more than four million shares on daily basis—with a tight penny bid/ask spread—and has bullish technical tendencies. Furthermore, the ETF’s 0.66 three-year beta and 8.9 three-year standard deviation is well below the S&P 500 Index’s 1.0 and 11.9, respectively, highlighting its lower-risk historical attributes.”

The analyst has an Overweight rating on USMV.

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