It hasn’t been a very smooth ride for equity markets these past few weeks. After a long stretch of very low volatility and steady if not spectacular gains, we’ve begun to see some weakness in Canadian equity markets since April, capped off recently by some more substantial triple-digit point swings in equity indices in August.
So rocky are stock prices of late that the Volatility Index (VIX) crossed 50 intraday in August, a level it has not seen since the tumultous days of the financial crisis in late 2008, early 2009.
Investors have certainly maintained great composure over this period but have also become more cautious and concerned with this recent volatility triggered by events in China, Greece, Korea, and even the U.S. that continue to run their course heading into the tail-end of the year. Investors are far better equipped today to deal with the market’s gyrations than they were seven years ago at the height of the crisis.
Minimum volatility ETFs
This goes for those who want to mitigate the risk associated with heightened volatility as well as for those who recognize the ongoing turbulence as an opportunity. Minimum volatility ETFs can be of particular benefit in current market conditions and are intended to help reduce risk, while capturing broad market exposure without significant bias in countries, sectors, or styles. iShares has a suite of five minimum volatility funds covering the major global markets including iShares MSCI Canada Minimum Volatility Index ETF (TSX: XMV), which follows the MSCI Canada Minimum Volatility Index.
This index seeks to offer at least comparable returns to the S&P/TSX Composite Index, but importantly with a lower volatility profile.
This is especially relevant during times of market stress as we’ve experienced recently. In fact, the actual experience to date for the fund has not simply been achieving comparable returns, but outright outperformance while at the same time offering lower overall volatility.
This has been accomplished over the past three years by capturing the majority of the upside in equity prices to the tune of 87%, however mitigating negative moves by only capturing 57% of the downside1.
That best-of-both-worlds kind of outcome doesn’t always pan out, of course, but by seeking to limit the downside risk during some of the most volatile market periods, it offers investors an extremely powerful tool during periods of market stress.
Risk mitigation plus investment versatility
Minimum volatility ETFs, therefore, offer a way to help limit risk, but not always at the expense of higher returns. As a result, they can be used independently for regional exposure or added to existing investments in an effort to smooth volatility.
Still, they may not be exactly the right fit for everyone and especially those who want to take a more aggressive, tactical approach to the wild fluctuations in market prices evident right now.
One of the main benefits of ETFs, don’t forget, is their flexibility and ease of use as a tool for investors wanting to add or subtract exposure to targeted areas of the market such as the hard hit energy sector or geographic regions like Europe and Japan.
Ultimately, exchange traded funds offer solutions to all types of investors with all types of objectives. Combating volatility is no exception.
Courtesy Fundata Canada Inc. © 2015. Pat Chiefalo, CFA, is Managing Director, BlackRock Canada, and is the head of Product for iShares Canada. This article first appeared in the Fall 2015 issue of Your Guide to ETF Investing, published by Brights Roberts Inc. Used with permission. Securities mentioned are not guaranteed and carry risk of loss. This article is not intended as personalized advice.
