Use This ETF As An Election Hedge

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About: iShares Edge MSCI Minimum Volatility USA ETF (USMV)
by: Dave Dierking, CFA
Summary

The impact of Tuesday's presidential election results bring risk minimization strategies into focus.

A flight to quality in some form is a likely outcome.

Minimum volatility ETFs have demonstrated an ability to reduce risk by 20-30% while nearly matching the S&P 500's total return.

This article originally appeared on ETF Daily News. The link can be found here.

Election Day is on Tuesday and it's quite possible we've never seen a presidential election with two such polarizing candidates. The S&P 500 has been on a streak of nine consecutive down days through Friday, the longest such streak since 1980, and part of the reason is the result of the election. The market doesn't care for uncertainty and the economy as well as the stock market could be headed on wildly divergent paths depending on who wins. Hillary Clinton has talked about reducing taxes on middle Americans and small businesses, while lifting tax rates on the wealthy. Donald Trump has discussed taking on the Fed and overhauling the nation's tax code.

With such a wide range of possible outcomes, it's difficult to determine how the market will react post-election except to say that there's a good chance we'll see a flight to quality in some form during the month of November. With such a degree of uncertainty, investors may want to look for ways to minimize the volatility in their portfolios.

The iShares MSCI USA Minimum Volatility ETF (BATS:USMV) invests in a basket of roughly 170 different stocks that have traditionally demonstrated below average risk. Its primary criteria in determining this are Morningstar's upside and downside capture ratios, measures designed to assess how well a fund outperforms during periods a positive returns and avoids losses in down markets.

According to Morningstar, since the fund's inception it has managed to capture roughly 80% of the S&P 500's upside and only 51% of its downside. These ratios aren't the only risk metrics that show the fund delivers on its objective. Using the monthly standard deviation of returns over the past one-, three- and five-year lookbacks suggests that the fund is roughly 20% less risky than the S&P 500. The fund's beta of 0.67 intimates that it might be even less risky than that.

You might think that a conservative equity fund like this is loaded up on consumer goods and utilities but that actually isn't the case here. The Minimum Volatility ETF's top two sectors are healthcare (19%) and technology (16%). Tech looks like a potential value play at current levels but the fund's healthcare holdings could be at risk. Clinton has already remarked how she wants to end pharmaceutical price gouging. At the same time, the Department of Justice is looking at bringing charges against some of the big generic drug makers accusing them of price collusion.

While the fund has delivered on its goal of risk minimization, it hasn't done so at the expense of returns. Year-to-date, the Minimum Volatility ETF has beaten the S&P 500 by about 2%. Since inception, its 90% return narrowly trails the 93% return of the benchmark index.

Clinton and Trump both represent interesting case studies in economic policy. Given that portions of each of their plans could cause major ripples on Wall Street, the markets may be prepared to move decisively depending on who wins Tuesday. Hedging your bets at this point with funds that lower portfolio risk might not be a bad idea.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.