They Want Max Vol

I want to share a quick story on how investor appetite changes.

Today we’re going to be looking at USMV, the iShares min-vol factor ETF.

From the launch in late 2011 up through February of last year, money poured in, passing $40 billion. It was one of the top 20 ETFs by assets.

The story was a good one. Equity returns with a smoother ride. And it worked…

…The standard deviation was 10%, compared with 17% for the S&P 500. And with one minor exception in 2016, it had lower drawdowns than the S&P 500 every time a pullback came around. In December 2018, it fell less than 13% from its high, compared to a 20% drop for the S&P 500. Not bad at all…

…But then, when the real test came in 2020, this strategy did not shield investors from the selloff. They got all of the downside…

…And worse, when the market recovered, they didn’t get nearly as much as the upside…

…Driving relative performance to a 10-year low…

…And investors running for the hills. In terms of total return, the strategy is just 1.3% below its highs, but assets are nearly 30% below where they were a year ago…

…Because the last thing investors want in a rip-roaring bull market is low volatility. Between Spacs and meme stocks and small stocks and Bitcoin, boring is out of fashion.

Min-vol will have its day in the sun again, but right now, investors want max vol.