iShares Files For Minimum Volatility ETFs

by on April 17, 2011

iShares has stuffed two more ETFs into an already full product pipeline, detailing plans for a pair of exchange-traded funds offering exposure to equities that exhibit low volatility. The MSCI All Country World Minimum Volatility Index Fund would seek to replicate a benchmark comprised of securities from both developed and emerging markets that have absolute lower volatility. The benchmark includes about 25 countries, and the largest sector weightings will be to financials, consumer staples and health care. There are about 270 individual securities making up the underlying benchmark.

According to the SEC filing, relative to the MSCI Global Standard Index, the MSCI Global Minimum Volatility Index has demonstrated (i) lower portfolio beta; (ii) lower portfolio volatility; (iii) lower market capitalization bias; and (iv) bias towards securities with lower distinctive risk. Starting with a broad universe of eligible companies, quantitative screens will be applied to derive a sub-set of companies that will exhibit lower absolute volatility. There will be certain restrictions in place to mitigate concentration risk:

  • The maximum weight of an index constituent will be the lower of 1.5% or 20 times its weight in the MSCI Global Standard Index;
  • The minimum weight of an index constituent will be 0.05%;
  • For countries in the MSCI Global Standard Index with weight greater than or equal to 2.5%, the MSCI Global Minimum Volatility Index weight will not deviate by more than ±5% of its weight in the MSCI Global Standard Index;
  • For countries in the MSCI Global Standard Index with weight less than 2.5%, the maximum MSCI Global Minimum Volatility Index weight will be three times its weight in the MSCI Global Standard Index;
  • Sector weights will not deviate by more than ±5% from its weight in the MSCI Global Standard Index;
  • Exposure to risk indices from Barra’s multi-factor risk model, including (i) Momentum; (ii) Value; (iii) Size; (iv) Size Nonlinearity; (v) Growth; (vi) Liquidity; and (vii) Financial Leverage will be limited to ±0.25 standard deviations relative to the MSCI Global Standard Index; exposure to the volatility risk index will be unlimited; and
  • The maximum turnover will be 10%.

Emerging Markets ETF Also Planned

In a separate filing the company detailed plans for an emerging markets version as well. The iShares MSCI Emerging Markets Minimum Volatility Index Fund would seek to replicate an index that consists of stocks from 19 emerging market economies. This proposed fund would start with the MSCI Emerging Markets Index–the underlying for the ultra-popular EEM and VWO–and implement a rules-based methodology to determine optimal weights for securities in the index with the lowest total risk [see all funds in the Emerging Markets ETFdb Category].

iShares had previously detailed plans for similar products focusing on other regions of the world. In January, the company laid the groundwork to introduce the MSCI USA Minimum Volatility Index Fund and the MSCI EAFE Minimum Volatility Index Fund. Neither of those products has launched yet.

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Disclosure: No positions at time of writing.