USMV: Low Volatility Does Not Equate to Low Risk

USMV, the iShares MSCI USA Min Vol Factor ETF, is marketed as a lower-risk investment option. While it achieves lower standard deviations in returns, this does not necessarily mean it is a low-risk investment.

The iShares MSCI USA Min Vol Factor ETF (USMV) is often marketed as a lower-risk investment option, appealing to investors seeking to mitigate volatility in their portfolios. However, a closer examination reveals that while USMV achieves lower standard deviations in returns, this does not necessarily equate to lower risk.

Factor Exposure and Performance

USMV is a Large-Cap Low Volatility ETF, with a significant exposure to the Technology sector, particularly Software & Programming industries [1]. Its exposure to major investing factors—value, momentum, quality, and low volatility—is summarized as follows:
- Value: 47
- Momentum: 55
- Quality: 76
- Low Volatility: 97

While USMV scores high in low volatility, its performance over the 5-year period has been relatively poor compared to other ETFs, including the broader market [3]. This highlights that achieving low volatility does not necessarily translate into superior returns or lower risk.

Sectoral Exposures and Correlations

USMV's sectoral exposures show a significant concentration in Technology (26.99%), Financial Services (15.94%), and Healthcare (17.39%) [2]. This concentration is somewhat different from the broader market, which tends to have higher exposures to Consumer Discretionary and Technology sectors. However, USMV's correlation with the broader market remains high, indicating that its sectoral exposures do not provide a significant diversification benefit.

Risk and Volatility

The concept of risk is often equated with volatility, but this is not a rigorous approach. Volatility measures the degree of variation in a stock's price or returns, but it does not necessarily reflect the underlying business risk. USMV's lower standard deviations in returns and prices suggest lower volatility, but its performance over the 5-year period has been the worst among several ETFs, including the iShares Core S&P 500 (IVV) [3]. This indicates that USMV has not been able to achieve superior upside asymmetry, despite its lower volatility.

Conclusion

USMV's marketing as a lower-risk investment option is misleading. While it achieves lower volatility, this does not equate to lower risk. Its performance over the 5-year period has been poor, and its correlation with the broader market remains high. Investors seeking a lower-risk option might consider other investments, such as bonds, to achieve a similar beta and ostensibly to underlying macro issues.

References

[1] https://www.nasdaq.com/articles/detailed-fundamental-analysis-usmv-4
[2] https://money.usnews.com/funds/etfs/large-blend/ishares-msci-usa-min-vol-factor-etf/usmv
[3] https://seekingalpha.com/article/4807634-usmv-low-volatility-does-not-mean-low-risk