Low Volatility ETFs and Their Underlying Indexes – USMV, EFAV, and SPLV

Weighing between risk and return, most investors actually would go for risk aversion if they have to take a side. Such preference is satisfied by constructing minimum-variance and managed volatility indexes and corresponding ETF products were launched to the market early in the 1990s. USMV, EFA, and SPLV are the top three with $12.7, $6.7 and $6.5 billion AuM respectively.

iShares Edge MSCI Min Vol USA ETF, USMV, tracks the MSCI USA Minimum Volatility Index. The MSCI Parent Indices serve as the universe of eligible securities for optimization, which is based on the previous Barra Global Equity Model (GEM). The MSCI Minimum Volatility Index seeks to have the lowest absolute volatility based on a set of constraints using the most recent release of the Barra Open Optimizer, which determines the optimal solution, i.e. the portfolio with the lowest total risk, using an estimated security covariance matrix under the applicable investment constraints.

EFAV, The iShares Edge MSCI Min Vol EAFE ETF, tracks MSCI EAFE Minimum Volatility Index, which is created with the same methodology but for an international universe.

SPLV, the PowerShares S&P 500 Low Volatility Portfolio is built upon S&P 500 Low Volatility Index, which is not focused on the low volatility of the whole portfolio, but on picking individual stocks with low price fluctuation over years. The selection of index constituents is done as follows:

  1. Using available price return data for the trailing one year of trading days leading up to each index rebalancing reference date, the volatilities of the constituents within each eligible universe are calculated.
  2. Constituents meeting eligibility requirements as described under Eligibility Criteria are, then, ranked in descending order based on the inverse of the realized volatility. The top securities with the least volatility, as determined by each index’s targeted constituent count of the index.

Comparing these three ETFs’ past price performance, both USMV and SPLV well track the performance of S&P500 broad U.S. market, while, as expected, EFAV’s return line divert quite significantly because of its international scope. It seems in EAFE market, low volatility stocks yield less compared to their counterparts in the U.S. market.


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