Article
A glance at today’s headlines shows that COVID-19 and the uncertainty it is creating on the markets are far from over. In turbulent times such as these, many investors want to shore up their portfolios and hedge against major fluctuations.
October 19, 2020
The minimum volatility ETF launched by Credit Suisse Asset Management in July 2020 pursues precisely this strategy. And it does so sustainably.
The CSIF (IE) MSCI World ESG Leaders Minimum Volatility Blue UCITS ETF combines a low-risk strategy (minimum volatility) with sustainable investing (ESG1) in a single product, which is also accessible to both private and institutional investors (ETF2).
As the name suggests, minimum volatility indexes pursue a strategy of lowest-possible fluctuations. This is achieved by selecting stocks that have on the one hand a weak correlation to the market4 and on the other a negative correlation to each another. The optimized approach results in reduced volatility within the portfolio. This means that, historically speaking, minimum volatility indexes have recorded lower losses in down phases compared to standard indexes. In addition, the MSCI World ESG Leaders Minimum Volatility Index avoids concentrations in country and sector weightings as well as excessive shifts within the index. This averts cluster risks and minimizes costs (a lower number of trades equals lower costs). Because the index focuses on positions with greater price stability5 without reducing the equity allocation within the portfolio as a whole, the new CSIF (IE) MSCI World ESG Leaders Minimum Volatility Blue UCITS ETF offers a certain level of protection against losses.
Minimum volatility indexes have mostly outperformed the corresponding standard indexes over the last ten years. They thus refute the oft-cited principle in general financial market theory that lower risk goes hand in hand with lower returns. In March 2020, for example, when many shares collapsed due to the COVID-19 pandemic, the MSCI World ESG Leaders Minimum Volatility Index shed 9.26%, while the MSCI World Index suffered a much more significant correction of 13.17% (see chart below).6
Properties and composition of the MSCI World ESG Leaders Minimum Volatility Index
Companies that incorporate ESG criteria into their operational management often achieve better results than the broader market. They exhibit an advantageous risk profile due to their sustainable use of resources. The MSCI ESG Leaders indexes target companies that come out best in class in each sector of the standard index according to ESG criteria. A comparison of the performance of ESG Leaders indexes with that of their standard indexes shows that almost all ESG indexes have outperformed their standard index from a historical perspective. The MSCI World Minimum Volatility Index, for example, generated a significantly higher return than the market-weighted standard index over extended periods of time, while also exhibiting lower volatility. The MSCI World ESG Leaders Minimum Volatility Index, launched in May 2020, even outperformed its non-ESG equivalent to a considerable degree (see chart below).7
The one exception is the US, which – with the MSCI World ESG Index – was the only region to underperform its standard index. This is attributable above all to large technology companies such as Facebook, which exhibit above-average historical performance but are not rated by MSCI as being sufficiently sustainable. The reasons why Facebook was excluded from the MSCI ESG Leaders indexes include shortcomings in terms of its data protection guidelines and the way in which the company collects data from individuals for advertising purposes.
Sustainability and a good risk/return profile are, however, not the only selling points of the new ETF. Since the ETF is listed, its shares can be bought and sold at any time while the stock market is open. This gives investors more flexibility in their daily trading. ETFs are generally traded at the bid or ask price, with the price spread dependent on trading volume. This means that investors see the price achieved straight after the transaction. Another advantage of the newly launched ETF is that it is domiciled in Ireland and therefore offers a tax advantage in terms of the withholding tax levied on US equities: for Irish ETFs, the deduction applied to dividends is just 15%, instead of 30% for index funds. In the case of the CSIF (IE) MSCI World ESG Leaders Minimum Volatility Blue UCITS ETF, this translates into an advantage of 0.24%.8 The ongoing costs of the fund (0.25%) are therefore practically offset by the tax benefit.
In summary, index funds on minimum-volatility indexes generally exhibit lower fluctuations than a broadly weighted equity portfolio according to market capitalization. This also applies to the new CSIF (IE) MSCI World ESG Leaders Minimum Volatility Blue UCITS ETF. Products such as these are especially suited to investors who want to carefully increase their equity allocation or reduce risk in view of the currently highly volatile market. Our minimum-volatility ETF allows investors to reduce equity risk in a transparent and cost-effective manner without reducing the equity allocation. Macroeconomic factors or external shocks can, however, also lead to falling prices even when pursuing a minimum-volatility approach. The ETF has no capital protection.
Historical performance indications and financial market scenarios are not reliable indicators of current or future performance. The product’s investment objectives, risks, charges and expenses, as well as more complete information about the product, are provided in the fund prospectus (or relevant offering document), which should be read carefully before investing. The tax treatment depends on the individual circumstances of each client and may vary over time. Credit Suisse does not provide any tax advisory services, and tax aspects have not been taken into consideration when calculating the return.
1. ESG = environmental, social, and governance.
2. ETF = exchange-traded fund.
3. Volatility: a statistical measure of the variation in returns of a certain security or index.
4. Beta <1.
5. Price stability refers to volatility. The stocks selected exhibit low volatility (no large fluctuations expected in terms of price).
6. Source: MSCI, 03.07.2020.
7. Source: MSCI, data preceding 25.05.2020 are simulated.
8. 2.79% (dividend yield) × 15% (US advantage IE versus LUX) × 58.23% (US weighting) = 0.24%.
Source: MSCI fact sheet www.msci.com/documents/10199/4d36bca8-b340-583c-101e-31a834daa88e
CREDIT SUISSE ASSET MANAGEMENT (Switzerland) Ltd.
Source: Credit Suisse, unless otherwise specified
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