Produced in partnership with iShares by BlackRock.
A foundational building block of many institutional investment portfolios is an equity strategy that few retail investors have heard of – and yet has consistently reduced total portfolio risk while enabling investors to retain exposure to the equity market.
Minimum volatility strategies, also referred to as low volatility strategies, have historically delivered comparable long-term returns to broad equity strategies – but with less volatility.
On a risk-adjusted basis, minimum volatility strategies have outperformed broad equity strategies by exploiting the low volatility anomaly, which shows that low volatility securities – because they historically fell less in downturns – tended to generate higher returns over the longer term.
This challenges the belief that in order to capture higher returns, investors must accept higher risk.
While that may typically be the case, particularly in bull markets, it may be different when conditions are deteriorating.
Current economic and market conditions are primed for minimum volatility strategies to demonstrate their value, according to Tamara Haban-Beer Stats, ETF and Index Investments specialist at iShares by BlackRock.
“There have been significant bouts of volatility already in 2026 and that is bringing these strategies to the forefront of investors’ minds,” she tells Professional Planner, citing the MSCI World ex-Australia Index’s fall of over 4 per cent in AUD terms in the three months to 28 February 2026.
During this short-term pullback in global equities, the iShares MSCI World ex-Australia Minimum Volatility ETF (ASX: WVOL) returned 0.81% after fees, demonstrating the strategy’s purpose and value.
“These strategies are designed to give investors a smoother ride, which is especially appealing to people who value greater stability through the ups and downs of market cycles,” Haban-Beer Stats says.
“In more complex and uncertain times, investors can use minimum volatility strategies to maintain their exposure to equities while being more deliberate about their beta exposures and allocation to diversifiers.”
BlackRock’s view is that the global economy and financial markets are undergoing a period of transformation, driven by mega forces like the AI buildout and increasing geopolitical fragmentation. These dynamics mean companies are grappling with uncertainty around interest rate policy, global trade and supply chains, geopolitical unrest, and questions about the pace and scale of investment in the AI build out. The global giant remains bullish on stocks but says targeted exposure matters more than broad market investing and investors should look beyond cash and money markets for diversified income sources.
Structural and behavioural bias
While volatility is a given when it comes to equity investing, the expectation that there is some sort of linear relationship between risk and return is not, says Ben Garland, MSCI head of factor index products, Europe, the Middle East and Africa (EMEA).
“The assumption of more risk, more return, less risk, less return is typically true, however, less risky stocks have historically delivered higher risk adjusted returns than higher volatility stocks,” he says.
“It’s not as simple as low-risk stocks outperform high-risk stocks, but per unit of risk, people often overpay for higher-risk stocks and, therefore, low-risk stocks are often underpriced.”
The reason the low volatility anomaly exists is both structural and behavioural, according to Garland.
Structurally, most active managers are benchmarked to a major index, such as the MSCI World ex-Australia Index. In a bid to outperform, they increase their exposure to riskier stocks. As investors pile into riskier stocks chasing higher returns, those stocks are bid up while less exciting stocks look relatively cheap.
Behaviourally, some investors are happy to take a punt on riskier stocks, even if the maths don’t totally add up, for potentially higher returns.
It is this combination of “lottery ticket chasing” investors overpaying for high-growth, high-beta stories and the structural forces of active investors constrained to a benchmark that are trying to outperform that benchmark that cause the low volatility anomaly, Garland says.
“Low volatility equity strategies effectively do what it says on the tin; provide equity exposure with low volatility because they have a lower exposure to the market and often more defensive sector tilts such as healthcare, utilities and consumer staples,” he says.
“Their objective is to reduce sensitivity to market swings and deliver better long-run risk-adjusted returns than standard market-cap-weighted exposures.”
Building a low volatility index
BlackRock launched the iShares MSCI World ex-Australia Minimum Volatility ETF in October 2016, using the MSCI World ex-Australia Minimum Volatility Index as its benchmark. In Australia, the group manages over AU$103 million in minimum volatility ETF strategies (as of 1 April 2026).
Minimum volatility ETFs form part of the broader suite of iShares Factor ETFs, with US$253 billion managed globally on behalf of both institutional and retail investors.
“With minimum volatility ETFs, retail investors can access an institutional grade, tightly controlled, managed exposure to equities in a neat and efficient vehicle,” Haban-Beer Stats says.
“These strategies haven’t traditionally been accessed by retail and advised investors in Australia, but we set out to change that. It’s all about giving people choice, whether they’re institutional or advised investors.”
According to Garland, there are a number of ways to build a low volatility strategy or index. The simplest is to rank stocks by their volatility and select the lowest volatility securities.
MSCI uses an optimisation approach that combines a risk model and mathematical techniques to construct a theoretical minimum variance or minimum volatility index, he says.
“Our approach focuses on building an index that achieves the lowest overall risk, rather than simply selecting a basket of low volatility stocks,” Garland says.
“We’re helping investors find that sweet spot on the risk spectrum, focusing on minimising that risk and managing it through time.”
