iShares: Insurers Embrace Min-Vol ETFs

May 16, 2014

And so should retail investors, according to an iShares official.

ETFs, specifically minimum-volatility funds, have grown into strategic investments for insurance companies, which are making min-vol ETFs a core part of their portfolios, according to Raman Suri, a managing director at iShares.

Retail, and now institutional, investors, still unsettled by the financial crisis five years ago, remain keen on taking some risk off the table in the form of security selection that favors less volatile stocks than the broader market contains. That seems particularly true given ongoing tensions in Ukraine, and weak or mixed economic data coming out of the U.S. and China.

In light of the recent sell-off in momentum stocks, Suri recently spoke with staff writer Hung Tran about why insurers are adopting minimum-volatility strategies in their portfolios, and why it makes sense for retail investors to pay attention to these strategies. Why have min-vol strategies become so popular with institutions, and are there any anecdotes you can share regarding actual adoptions of these strategies?

Raman Suri: Minimum volatility has become more attractive to insurers because they’re searching for yield in equities but don’t want the volatility associated with equities. So using a min-vol strategy allows them to improve the risk characteristics of the overall portfolio, even though they’re moving away from fixed income and into minimum volatility.

Risk is a big concern in the thinking of insurers, especially when they’re going out of their home ground of fixed income and into equities. So their thinking is if they can get low beta and low volatility, why not do min-vol rather than straight market cap?

One large insurer in the Midwest has made min-vol strategies its core strategies on the U.S. and international indexing side rather than market-cap strategies. It’s used the iShares MSCI USA Minimum Volatility ETF (USMV | A-58), the iShares MSCI Emerging Markets Minimum Volatility ETF (EEMV | B-65) and the iShares MSCI EAFE Minimum Volatility ETF (EFAV | B-51).

So that may be different from advisors using min vol as a satellite strategy on top of their core market-cap exposure. How can retail investors benefit from min-vol strategies given current market conditions featuring S&P 500 Index seesawing between gains and losses?

Suri: One of the things with min vol we definitely talk to institutional and retail clients about is that both types of investors need to have it for the long-term horizon. If you look at 2013, min vol underperformed market-cap indexes, but I think we can say it did what it was expected to do.

You didn’t have a lot of volatility; you had a straight upward-moving market, and we did see some outflows from retail investors earlier in the year reflecting that performance.


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