Sail Smoothly with This Smart Low-Volatility Fund

Doug Fabian

Doug Fabian is known for his expert knowledge of ETFs, bear funds and enhanced index funds to profit in any market climate.

Volatility, the potential for the market or a stock to swerve sharply in value, serves as a deterrent for many prospective investors. After all, who wants to lose a sizable portion of hard-earned savings in a flash? Luckily for investors such as these, there exists a smart beta ETF designed specifically to offer a calmer approach: iShares MSCI USA Minimum Volatility (USMV).

USMV provides two layers of low-volatility protection. First, it follows an index composed of U.S. equities selected by their relatively low levels of volatility characteristics when compared to the broader market. Second, as a smart beta fund, USMV further weights its investment in each security of the index with regards to volatility to reduce risk even further.

The reduced-risk approach of this non-diversified fund has proven profitable this year, as USMV is up 7.35% since 2014 began. This ETF also offers a dividend yield of 2.22%.


This smart beta fund is well diversified both in its sector weightings and in its individual holdings. This reflects its low volatility approach: too many eggs in one basket could lead to big losses. Its largest sector weightings are healthcare, 18.44%; consumer defensive, 16.21%; and industrials, 11.65%. USMV also has holdings in many other sectors, including basic materials, consumer cyclical, financial services, real estate, utilities, communication services, energy and technology.

USMV’s top 10 holdings only compose 14.65% of the fund’s total assets, so there is no huge concentration in a handful of companies. In addition, most of these 10 companies are household names. The top five of these are: Pepsico, Inc. (PEP), 1.54%; Merck & Company, Inc. (MRK), 1.53%; Automatic Data Processing, Inc. (ADP), 1.50%; Johnson & Johnson (JNJ), 1.48%; and Ecolab Inc. (ECL), 1.47%.

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Volatility in the markets can be an unsettling prospect for possible investors. USMV and its two-layered approach to reducing risk could be a potentially profitable way to try to protect your investment capital from any big downturns that the market may take.

If you want my advice about buying and selling specific ETFs, including appropriate stop losses, check out my Successful ETF Investing newsletter. As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an e-mail. You just may see your question answered in a future ETF Talk.

In case you missed it, I encourage you to read my e-letter column from last week about a dividend-oriented smart beta ETF. I also invite you to comment in the space provided below.

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