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2018.11.18 Penn Wealth Report Vol 6 Issue 05

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14 PeNN Wealth Report volume 6 issue 05 18 Nov 2018 Penn Wealth Report Copyright 2018. All Rights Reserved. investment intelligence The iShares Edge MSCI Minimum Volatility USA ETF was finally combat tested—and it held up even better than we had hoped Managing Volatility Bear Market Strategies We've tested all of the so-called "risk managed" funds over the past two decades, and we remain underwhelmed. More often than not, these investments tend to under- perform in bull markets and drop just as much as their benchmark indexes in bear markets. at being said, after the October rout in the markets, we do have a clear win- ner in the space. Before discussing our latest addition to the Penn Dynamic Growth Strategy, which happens to be a low-vol investment, let's take a look at what these vehicles are sup- posed to do. Using some methodology to reduce beta below 1.00 (the risk level of the S&P 500), these funds are advertised as a way to be "in the market" without taking on all of the risk. e Invesco S&P 500 Low Volatility ETF SPLV , for example, is based on the index by the same name, and buys the 100 stocks in the S&P 500 with the lowest realized volatility over the previous twelve months. e holdings then go through the same screener every quarter for rebalancing. Our choice, the iShares Edge MSCI Minimum Volatility USA ETF USMV , takes a more in-depth analytical approach. is fund uses an advanced algorithm to con- struct a "minimum variance" portfolio of holdings, one that considers the correlation between these equities. e fund's propri- etary process has some fascinating results. For example, while SPLV has nearly one-quarter of its holding in the utilities sector (as could be expected, based on its approach), and another 34% in real estate and financial ser- vices, USMV has just 8% in utilities and the sector dispersion is much smoother (15% industrials, 15% healthcare, 12% technology, and so on). Strategies always sound great in theory, but the proof is in the pudding. How they hold up under actual market conditions is the real test. Fortunately (or unfortunately for investors), October morphed into a great little Petri dish in which to study USMV. Bear market performance. Take a look at the accompanying graph, which shows USMV (blue line) as compared to three different indexes through the month of October: the S&P 500, the NASDAQ, and the Russell 2000 (small-caps). Anyone invested in a plain-vanilla S&P 500 index lost 7.28% of their portfolio's value during the month, while those invest- ing in tech stocks or small-caps lost nearly 10%. at is of interest, because both of those segments of the market had been on a tear going into the month. USMV, however, was down just 4.03% in October—around 50% less than the indexes. In other words, its performance lived up to its hype. With over 200 holdings in the fund, it is nearly impossible for bad news hitting any one holding to have an impact on overall performance. On the other hand, USMV is filled with some pretty impressive growth names. McDonald's, Lockheed Martin, Newmont Mining, and NextEra Energy are all top holdings within its eclectic portfolio. e fund has a beta of .70, meaning the aggregate holdings offer about 30% less risk than the benchmark. As for cost, it doesn't get much better than this: the gross expense ratio is just fifteen basis points, or 0.15%. With more anticipated volatility heading our way in 2019, we have moved this invest- ment into a core role within the Dynamic Growth Strategy, and are comfortable with no stop-loss in place. A stable of 205 strong holdings, nicely split between industries and sectors, and with an extremely low cost; what more could we ask for? e content of this report reflects the personal views, opinions, and research of Penn Wealth Publishing. While measures are taken to help assure the accuracy of data, no guarantees can be made and the firm is not liable for any losses incurred by subscribers. is is not a solicitation to buy. Always consult your investment professional before investing any money.

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