The iShares MSCI USA Min Vol Factor ETF (NYSEARCA:USMV) has prompted some serious reflection among risk-averse investors since its inception. Many buyers, particularly retirees seeking a stable equity exposure in 2021, now face a pivotal decision regarding their investment’s value.
Performance Comparison: USMV vs. S&P 500
Over a five-year period, USMV has yielded approximately 45%, while the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) has delivered around 92%. For example, an initial investment of $100,000 in USMV has transformed into roughly $145,000, in contrast to a staggering growth to about $192,000 for the same amount in SPY. This represents a substantial opportunity cost for USMV investors—around $47,000 over five years due to its slower compounded returns.
Understanding USMV’s Strategy
The USMV seeks to minimize portfolio volatility by investing in large- and mid-cap U.S. stocks. It focuses on defensive sectors such as utilities and healthcare, intentionally underweighting high-beta sectors like technology. As a strategic choice, this approach provides investors with stability, albeit at the cost of potentially higher returns during bull markets.
Performance during Market Fluctuations
- In 2022, USMV declined 9%, compared to a 20% drop in SPY, showcasing its drawdown protection.
- During that same selloff, USMV experienced an 18.5% peak-to-trough decline.
While the fund cushioned losses in 2022, the subsequent recovery favored high-beta stocks, which USMV avoided. As a result, it struggled to keep pace with the S&P 500 in the years following the selloff.
Tradeoffs in Investment Strategy
Investors need to understand inherent tradeoffs in USMV’s strategy. The fund’s sector allocations can shift based on market volatility, leading to unexpected overexposure in defensive sectors just before interest rate hikes. Furthermore, while USMV provides some downside protection, there are no guarantees against future market downturns.
Alternative Strategies for Defensive Exposure
For those seeking defensive equity options, alternatives exist that may fit better within a broader strategy:
- The Invesco S&P 500 Low Volatility ETF (NYSEARCA:SPLV) returned approximately 35% over the same five-year span.
- Dividend-focused funds like Schwab US Dividend Equity ETF (NYSEARCA:SCHD) or ProShares S&P 500 Dividend Aristocrats ETF (NYSEARCA:NOBL) provide a different take on defensive investments.
Investment Considerations for Retirees
For many investors nearing retirement, a larger allocation to cash and bonds may be a more efficient way to achieve stability. Investing in a broad index may also simplify the goal of a smoother ride compared to selecting a defensively-tilted ETF like USMV.
Ultimately, USMV may serve as a small allocation of 5% to 10% for investors willing to accept slower growth for reduced drawdowns. However, it may not be suitable as a primary equity holding for those who prioritize growth in their portfolios. Alternatives such as long-term Treasuries might also be considered for those concerned about potential market downturns.
