Exchange traded funds (ETFs) are associated with passive index tracking, but, as the number of funds grows, providers are increasingly launching what they call 'smart beta' ETFs. Rather than tracking a mainstream index such as the FTSE 100, they track indices constructed to have a special focus or to minimise risk.
Recent additions to this space include iShares ETFs based on minimum volatility indices, which seek to offer reduced volatility compared with standard market-capitalisation-weighted indices. iShares MSCI Europe Minimum Volatility(MVEU), iShares MSCI World Minimum Volatility (MVOL), iShares MSCI Emerging Markets Minimum Volatility (EMMV) and iShares S&P 500 Minimum Volatility Fund (SPMV)are aimed at investors looking for a smoother ride and are the first ETFs domiciled in Europe to be created on these indices.
The MSCI Minimum Volatility indices are constructed by optimising the respective parent MSCI Indices, which are capitalisation-weighted, by determining weights for securities in the indices with the lowest total risk. Index constraints such as country, sector and style exposures are applied to the optimisation to ensure diversification, while broadly matching the profile of the corresponding cap-weighted MSCI index.