The backtest reported in this article showed that ranking the holdings of USMV, the iShares MSCI USA Minimum Volatility ETF, and selecting a portfolio of the 12 top ranked stocks, provided higher returns for the buy&hold portfolio than for the underlying ETF. To test these findings out-of-sample we launched the Best12(USMV)-July-2014on Jun-30-2014 and the first sister model Best12(USMV)-Oct-2014 on Sep-29-2014. Holdings and performance have been published weekly on our website since then. So far to Dec-15-2014 these portfolios have gained 19.2% (6.8%) and 10.5% (5.3%), respectively. (USMV gains are in brackets.) The test will be expanded by the launch on Jan-5-2015 of the second of the three sister models quarterly displaced, the Best12(USMV)-Jan-2015, which again will consist of the 12 highest ranked stocks of the then point-in-time holdings of USMV.
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Since end of June 2014 we provided updates of our Best12(USMV) at iM, a tax efficient model which holds positions normally for at least one year. Concurrently we were testing the Best12(USMV)-Trader model. The only difference between the two models is that the Trader is not restricted to hold stocks for a 1-year minimum period and has an additional sell rule based on rank. We backtested the Trader for various periods and found its returns to be to be marginally higher than that of the tax efficient Best12(USMV) model. However, returns were more consistent.
Three months ago we introduced the iM-Best12(USMV) model, which still holds the then twelve best ranked stocks selected from the holdings of USMV, the iShares MSCI USA Minimum Volatility ETF. So far this portfolio has gained 8.2%, while USMV is up a mere 2.2%, confirming the results of the backtest performed over a relative short period. The out-of-sample test will be expanded by the launch of the second of three sister models quarterly displaced, the Best12(USMV)-Oct-2014, which again will consist of the 12 highest ranked stocks of the then point-in-time holdings of USMV.
Minimum volatility ETFs should provide exposure to stocks with potentially less risk. They track indexes that try to capture the broad equity market with a reduced amount of volatility, seeking to benefit from what is known as low-volatility anomaly. Consequently they should show reduced losses during declining markets, but also reduced gains during rising markets. However, better returns with simultaneous tax efficiency can be obtained also during rising markets by selecting a number of the highest ranked stocks of a minimum volatility ETF and holding those positions for at least one year before new trades are initiated.
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