Minimum Variance Versus Low Volatility

Benchmarking USMV

February 2019. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • The largest smart beta Low Volatility ETF is technically a Minimum Variance strategy
  • Low Volatility and Minimum Variance have comparable and attractive characteristics
  • However, both currently feature a high sensitivity to interest rates


The Low Volatility factor was the best performing factor in 2018, which few investors expected at the beginning of the year. Central banks across the globe were expected to start normalizing their zero interest rate policies, which would be negative for Low Volatility stocks given interest rate sensitivity. Although the factor generated negative returns in the first few quarters of 2018, the performance turned positive in the final quarter when global growth concerns emerged and investors shifted expectations to less hawkish central bank policies (read The Dark Side of Low-Volatility Stocks).

Investors anxious about global growth and interested in Low Volatility strategies may consider smart beta ETFs. The largest smart beta ETF focused on this factor is the iShares MSCI Min Vol USA ETF (USMV), which has approximately $20 billion assets under management. Although the ETF’s marketing materials allude to low volatility, technically it represents a minimum variance strategy. Investors might question if a minimum variance strategy provides the same attractive characteristics of the Low Volatility factor. In this short research note, we will contrast Low Volatility to Minimum Variance.


USMV tracks the MSCI USA Minimum Volatility Index, which is based on the MSCI USA Index, a universe of the largest 600 U.S. stocks. The Low Volatility portfolio is created by sorting stocks of that universe by their annualized volatility and selecting the bottom 20% exhibiting the lowest volatility. Stocks are weighted by their market capitalization. The Minimum Variance portfolio is created by selecting stocks that will minimize the portfolio variance under certain constraints. These are in line with MSCI USA Minimum Volatility Index and are as follows:

  • Stock weights: The lower of 1.5% or max 20x the weight as per the stocks’ market capitalization, with a minimum of 5 basis points
  • Factor c