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During February, we think investors should consider iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ). In ranking approximately 860 equity ETFs, we combine holdings-level analysis with ETF-level attributes, such as bid/ask spread, expense ratio and volatility. According to Sam Stovall, US equity strategist for S&P Capital IQ, since 1946, there have been 56 pullbacks, or price declines of 5.0%-9.99%. They fell an average of 7% over a little more than one month and took fewer than two months to get back to breakeven. There have been 20 corrections (-10.0% to -19.9%) since WWII, erasing an average 14% from the value of the S&P 500. They typically took a bit more than four months to go from peak to trough and a similar number of months to recover fully. We think USMV is strong ETF for consideration for investors wanting to reduce the risk considerations of their overall U.S. equity exposure. We expect the market to remain volatile in February due in part to sluggish earnings and modest economic prospects, but we look to the S&P 500 index to end 2016 much higher than where it is currently trading. As such believe this ETF allows investors to stay fully invested while reducing the risk profile of their overall portfolio. Now is a good time, according to S&P Capital IQ, to look at low-volatility strategies. Yet it is important to understand how USMV is constructed. The ETF is diversified across all 10 sectors, but holds the least volatile securities within the sector. iShares, working with an MSCI benchmark, uses sector bands (+/- 500 basis points relative to a parent MSCI index at the semi-annual rebalance). As such, at year end, financials (22% of assets), health care (20%), information technology (15%) and consumer staples (15%) are the largest sectors. Relative to the parent MSCI index, tech is underweighted, while the other three are overweighted. Other sectors underweighted are industrials (4.5%) and energy (1.9%). From a sector perspective, USMV is different than its peer from PowerShares. That ETF has no sector bands and as such has more in financials (27% of assets) and less in tech (2%). USMV ranks favorably to S&P Capital IQ for all four risk consideration inputs to our ranking. Three of these, S&P Capital IQ Quality Rankings and Qualitative Risk Assessments, along with Standard & Poor’s Credit Ratings, are tied to the holdings. The relatively low risk of these holdings are well suited, we think, in the current choppy market. For example, Johnson & Johnson (NYSE: JNJ ) has an A+ Quality Ranking, a low risk assessment and AAA credit rating. S&P Capital IQ equity analyst Jeff Loo, who has a buy recommendation on the shares, view its capital deployment strategy of acquisitions and stock buybacks positively. In October 2015, JNJ announced a $10 billion stock buyback, and the shares currently have a 3% dividend yield. S&P Capital IQ sees earnings per share growing to $6.50 in 2016 and $6.82 in 2017, driven by pharma growth and restructuring efforts. Meanwhile, McDonald’s (NYSE: MCD ) has an A Quality Ranking, a medium risk assessment and BBB+ credit rating. S&P Capital IQ equity analyst Tuna Amobi, who has a buy recommendation on the shares, noted MCD reaffirmed its capital allocation initiatives after relatively encouraging Q4 results — including a 5% increase in global comparable sales — amid early positive signs on its multi-year turnaround strategy. After last year’s sweeping organizational changes Amobi sees further gradual progress on the turnaround initiatives, including an accelerated pace of global refranchising. S&P Capital IQ sees earnings per share in 2016 rising to $5.39 due to operating margin expansion and share repurchases. In addition, USMV earns a favorable ranking input for its below-average three-year standard deviation of 9.1 (ETFs tracking the S&P 500 index have 10.5). Daniel Gamba, managing director and head of BlackRock’s iShares Americas Institutional Business, told S&P Capital IQ in late January that the increased volatility in equity markets has made institutional investors more tactical in using minimum volatility products to lower risk. We think the increased usage of USMV by institutional investors has been a positive for all investors. The average daily trading volume in the past month spiked to 3.3 million, up from 2.0 million during the past six months. The bid/ask spread is $0.01, lower than most ETFs. In addition from a cost perspective, USMV has a modest 0.15% expense ratio. Year to date through January 27, USMV declined only 3.8%, falling less than half as much as the S&P 500 index. In 2015, during a relatively flat year with the broader index up 1.4%, USMV rose 5.5%. We like USMV based on its underlying holdings and from a cost/liquidity perspective. However, should the market volatility diminish quickly and equities to climb higher, this and other lower-risk strategies are prone to underperform in our opinion. Additional disclosure: http://t.co/AHwSBhyHHt Scalper1 News
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