Key Takeaways
- Low volatility (smart beta) ETFs aim to reduce downside risk while maintaining equity exposure.
- These strategies tend to outperform in downturns but may lag during strong bull markets.
- Market volatility has surged amid geopolitical tensions, pushing investors toward defensive strategies.
In periods of heightened market turbulence, investors often face a difficult trade-off: reduce risk, or stay invested. Strategic-beta ETFs focused on low volatility strategies aim to bridge that gap, offering equity exposure with a smoother ride. Four such ETFs, including two from iShares, carry Morningstar Medalist Ratings of Silver or Gold.
The outbreak of war in Iran has triggered one of the sharpest spikes in market volatility in recent years, with energy markets acting as the main transmission channel to global financial assets.
Equities have reacted quickly. By March, major indexes had entered correction territory: Equities have reacted quickly. By March, major indexes had entered correction territory: Last month, the Morningstar Global Markets Index fell more than 7%, meanwhile the Morningstar US Market Index declined by 5%, and the Morningstar Europe Index lost nearly 10%.
For investors, the result has been a rapid—and often painful—repricing of risk across asset classes, forcing a reassessment of portfolio strategy. Against this backdrop, those looking to reduce portfolio volatility without exiting the market entirely may want to consider low volatility strategic-beta ETFs.
What Is Strategic Beta?
Strategic beta, which is also known as smart beta, sits between passive and active investing. These strategies track rules-based indexes that deviate from traditional market-cap weighting in an effort to improve risk-adjusted returns.
Low volatility ETFs are one type of strategic beta investing. They typically select stocks with historically lower price fluctuations, aiming to deliver equity-like returns with less downside risk.
These strategies tend to tilt toward higher-quality companies: Firms with stable earnings, lower leverage, and more predictable business models. This often results in a natural bias toward defensive sectors such as utilities, healthcare, and consumer staples.
However, this comes with a trade-off. Low volatility strategies are generally countercyclical: They tend to hold up better during market downturns but can lag in strong bull markets when higher-risk stocks lead the rally.
4 Low Volatility ETFs for Investors
Below are Morningstar’s four top-rated low volatility equity ETFs, each with a different geographic remit: Europe, global markets, US, and emerging markets. A positive Morningstar Medalist Rating means Morningstar analysts believe a fund has the greatest chance of outperforming its category over the long term.
State Street SPDR EURO STOXX Low Volatility UCITS ETF ELOW
- Morningstar Category: Eurozone Large-Cap Equity
- Morningstar Medalist Rating: Gold
- Ongoing Charge: 0.30%
The EUR 32.7 million State Street SPDR EURO STOXX Low Volatility UCITS ETF fell 5.4% in March. However, the fund edged out the Morningstar Developed Eurozone Target Market Exposure Index, by 3.11 percentage points. According to Morningstar analysis, the strategy’s investment approach stands out and earns an Above Average Process Pillar rating. This fund tends to hold smaller, more value-oriented companies than its average peer in the Eurozone Large-Cap Equity Morningstar Category. The portfolio is overweight in utilities and real estate relative to the category average by 10.4 and 8.2 percentage points, respectively. On the other hand, the sectors with low exposure compared with category peers are technology and financial services, underweight the average by 13.6 and 6.0 percentage points of assets, respectively.
Xtrackers MSCI World Minimum Volatility UCITS ETF XDEB
- Morningstar Category: Global Large-Cap Blend Equity
- Morningstar Medalist Rating: Silver
- Ongoing Charge: 0.25%
The EUR 680.3 million Xtrackers MSCI World Minimum Volatility UCITS ETF fell 2.88% in March. The fund edged out the Morningstar Global Target Market Exposure Index, by 2.07 percentage points. The portfolio is created by optimizing the MSCI World Index, its parent index, to minimize absolute risk within a specific set of constraints, utilizing the Barra Optimizer for this purpose. It comprises roughly 270 stocks, representing about 20% of the MSCI World universe. In line with a low-volatility approach, it underweights cyclical sectors and emphasizes defensive sectors. At the country level, it is notably overweight Japan and Switzerland compared with both the parent index and the category average. It also favors large- and mid-cap stocks over giant-cap stocks.
iShares Edge S&P 500 Minimum Volatility UCITS ETF MVUS
- Morningstar Category: US Large-Cap Blend Equity
- Morningstar Medalist Rating: Silver
- Ongoing Charge: 0.20%
The EUR 1.5 billion iShares Edge S&P 500 Minimum Volatility UCITS ETF fell 3.05% in March. The fund fell further than the Morningstar US Large-Mid Cap Index, by 0.44 percentage points. The S&P 500 Minimum Volatility Index attempts to create the least volatile portfolio of stocks selected from the S&P 500. To do so, it is subjected to several constraints, which improve diversification, but may reduce its style purity. The S&P 500 Minimum Volatility Index’s portfolio is considerably smaller than that of its parent index. It consists of around 80 stocks (compared with the parent index’s 500 stocks), with the largest 10 holdings accounting for approximately 30% of the total weighting.
iShares Edge MSCI EM Minimum Volatility UCITS ETF USD (Acc) EMV
- Morningstar Category: Global Emerging Markets Equity
- Morningstar Medalist Rating: Silver
- Ongoing Charge: 0.40%
The EUR 276.8 million iShares Edge MSCI EM Minimum Volatility UCITS ETF USD (Acc) fell 6.69% in March. The fund edged out the Morningstar Emerging Markets Target Market Exposure Index, by 4.15 percentage points. The MSCI Emerging Markets Minimum Volatility Index, the benchmark these funds fully replicate, follows a meticulous set of instructions. It uses an optimizer to carve out a defensive portfolio from the MSCI Emerging Markets Index, a broad collection of large- and mid-cap stocks from developing nations. So far, the index has delivered on its goals. Its returns were roughly 25% less volatile than the MSCI Emerging Markets Index over the last 10 years. The fund lean as far as possible into defensive sectors. Healthcare, consumer defensive, and communications stocks normally brush up against the maximum 5% overweighting allowed following rebalances, but those tilts are too mild to dictate index-relative performance. Controlling these sources of risk preserves the low-volatility focus.
