ishares MINIMUM VOLATILITY SUITE SEEKING TO WEATHER THE MARKET S UP AND DOWNS

Transcription

1 ishares MINIMUM VOLATILITY SUITE SEEKING TO WEATHER THE MARKET S UP AND DOWNS

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3 Table of Contents 1 Introducing the ishares Minimum Volatility Suite Why Consider the ishares Minimum Volatility Suite? Understanding How the ishares Minimum Volatility Suite of ETFs Work Using ishares Minimum Volatility ETFs in Portfolios Why ishares ishares [1]

4 1 Introducing the ishares Minimum Volatility Suite Many investors will need stock market investments in order to meet their long-term financial goals An increasingly volatile world You ve watched the news, you know the story: market volatility is high and shows no signs of stopping. The volatility of the S&P 500 (measured by index movements of +/-2% on a given trading day) has dramatically increased when compared to the historic average. Between 1975 and 1984 there were fewer than 70 trading days where the S&P 500 moved up or down by at least 2%. Between 2005 and 2014, the number of volatile days has more than tripled to over 200. So how can investors adjust to the new world? FIGURE 1 Number of trading days on which the S&P 500 experienced a 2% or greater advance /decline, by decade RISING VOLATILITY 193 DAYS 219 DAYS 63 DAYS 95 DAYS % +2 % The number of trading days that the S&P 500 experienced swings of 2% has more than tripled in recent years compared to 40 years ago. [2] Source: Bloomberg, daily data from 1/2/1975 to 12/31/2014 for the S&P 500. Past performance is not necessarily indicative of future results. FIGURE 1 Number o f trading days on which the S&P 500 experienced Investor Guide to ishares Minimum Volatility a 2% or greater Suite advance /decline (by decade)

5 ACWV EFAV EEMV EUMV JPMV AXJV USMV GLOBAL DEVELOPED INTERNATIONAL EMERGING MARKETS EUROPE JAPAN ASIA EX JAPAN USA INTRODUCING ishares Minimum Volatility ETFs The ishares Minimum Volatility Suite of ETFs are designed to help investors weather the ups and downs of investing in global, U.S., developed international and emerging stock markets. With the ishares Minimum Volatility Suite, investors have the opportunity to benefit from broad market exposure, but with the potential for less risk. ishares MINIMUM VOLATILITY SUITE Fund Name Exposure Ticker Net Expense Ratio ishares MSCI All Country World Minimum Volatility ETF Global Stocks ACWV 0.20 %1 ishares MSCI EAFE Minimum Volatility ETF Developed International Stocks EFAV 0.20 %1 ishares MSCI Emerging Markets Minimum Volatility ETF Emerging Market Stocks EEMV 0.25 %1 ishares MSCI Europe Minimum Volatility ETF Europe EUMV 0.25 % ishares MSCI Japan Minimum Volatility ETF Japan JPMV 0.30 % ishares MSCI Asia ex Japan Minimum Volatility ETF Asia ex Japan AXJV 0.35 % ishares MSCI USA Minimum Volatility ETF US Stocks USMV 0.15 % 1 BlackRock Fund Advisors ( BFA ), the investment adviser to the ishares Minimum Volatility Funds and an affiliate of BlackRock Investments, LLC, has contractually agreed to waive a portion of its management fees through the following dates: ACWV: 12/31/15; EFAV: 11/30/15; EEMV: 12/31/15. Gross expense ratios are 0.34%, 0.34% and 0.67% respectively. ishares [3]

6 2 Why Consider the ishares Minimum Volatility Suite? The ishares Minimum Volatility Suite of ETFs may be suitable long-term investments through various market conditions why now Understandably, more than 50% of financial advisors view market volatility as a main risk to their clients financial future 2. Despite nearly six years of positive returns, the scars of the financial crisis and eurozone crisis have left many nervous about investing in stocks. However, the traditional safe havens of cash and government bonds have not provided much of an alternative, with returns at or near historical lows. The ishares Minimum Volatility Suite may provide much needed stock market exposure, with fewer bumps in the road. Benefits of the ishares Minimum Volatility Suite ``A Strategy for a Variety of Market Conditions The ishares Minimum Volatility Suite of ETFs are designed for long-term investing they may help to provide protection when the markets fall and potentially capture gains when they are up [rise]. ``Seek to Protect What You ve Earned Use the ishares Minimum Volatility Suite to stay invested in stocks while seeking to dampen the risks associated with heightened market volatility. ``Potential to Outperform Over Time Returns from traditional safe haven investments, such as cash or government bonds, are at low or even negative levels when inflation is taken into account. ishares Minimum Volatility ETFs offer a way to grow for the long term while managing market volatility. Each MSCI Minimum Volatility Index has provided a lower level of risk and a higher or a very similar level of return relative to its respective broad market 3 since December 2009 (see Figure 2, page 5). In addition, the indices ishares Minimum Volatility ETFs seek to track have captured more of the upside (when their respective broad market goes up) than the downside (when their respective broad market goes down) since December 2009 (see Figure 3, page 6). 4 2 The BlackRock Global Investor Pulse Survey Advisors surveyed. Question asked: Which if any of the following concerns pose a risk to your client s/your financial future? 3 The respective broad market for each Minimum Volatility index is represented by the MSCI ACWI Index, the MSCI EAFE Index, the MSCI Emerging Markets Index, the MSCI Europe Index and the S&P 500. Because of insufficient index history, does not include MSCI Japan Minimum Volatility Index or MSCI Asia ex-japan Minimum Volatility Index. 4 MSCI USA Minimum Volatility Index incepted: 5/30/08, all other MSCI Minimum Volatility Indices discussed (All Country World, EAFE and Emerging Markets) incepted: 11/30/09. Because of insufficient index history, does not include MSCI Japan Minimum Volatility Index (incepted 2/18/14) or MSCI Asia ex-japan Minimum Volatility Index (incepted 1/16/12). [4] Investor Guide to ishares Minimum Volatility Suite

7 FIGURE 2: Illustrative comparison of MSCI Minimum Volatility indices and their respective broad markets based on annualized risk and performance 20% Broad Market Index Minimum Volatility Index USA 15% GLOBAL ANNUALIZED RETURN 10% DEVELOPED INTERNATIONAL EMERGING MARKETS EUROPE 5% 0% 8% 12% 16% 20% ANNUALIZED RISK Source: Morningstar and MPI Stylus. Based on monthly index returns from 12/1/09-12/31/14. The respective broad market for each MSCI Minimum Volatility Index is represented by: the MSCI ACWI Index, the MSCI EAFE Index, the MSCI Emerging Markets Index and the S&P 500. Global = MSCI All Country World Minimum Volatility Index, Developed International = MSCI EAFE Minimum Volatility Index, Emerging Markets = MSCI Emerging Markets Minimum Volatility Index, Europe = MSCI Europe Minimum Volatility Index and USA = MSCI USA Minimum Volatility Index. Risk is represented by standard deviation, which measures how dispersed returns are around the average. A higher standard deviation indicates that returns are spread out over a larger range of values and thus, more volatile. Index data are for illustrative purposes only and do not represent actual ishares Fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. For actual ishares Fund performance, please visit or request a prospectus by calling iShares ( ). ishares [5]

8 DOWNSIDE UPSIDE FIGURE 3: DOWNSIDE PROTECTION, UPSIDE PARTICIPATION The MSCI Minimum Volatility Indices have captured more upside than downside relative to their respective broad markets since December 2009.* 100% 89 % % % % % 0% 40 % 46 % 62 % 65 % 47 % -100% EXPOSURE Global Developed International Emerging Markets Europe USA RELATED INDICES MSCI ACWI Minimum Volatility Index MSCI EAFE Minimum Volatility Index MSCI Emerging Markets Minimum Volatility Index MSCI Europe Minimum Volatility Index MSCI USA Minimum Volatility Index Source: Morningstar. Based on monthly index returns from 12/1/09 12/31/14. Index returns are for illustrative purposes only and do not represent actual ishares Fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. For actual ishares Fund performance, please visit www. ishares.com or request a prospectus by calling iShares ( ). *Up/down capture ratios will vary. The chart above presents the average since 12/09 for the respective indices. [6] Investor Guide to ishares Minimum Volatility Suite

9 Understanding How the ishares Minimum Volatility Suite of ETFs Work 3 How do ishares Minimum Volatility ETFs work? The ishares Minimum Volatility Suite of ETFs are designed to track indexes that seek to capture the general movements of broad equity markets, with a reduced amount of risk. In other words, these funds aim to reduce some of the ups and downs of investing in the stock market. ishares Minimum Volatility ETFs can offer less risk by tracking indexes that seek an optimal mix of less volatile stocks. First, the index provider considers the volatility of each individual stock (i.e. how its individual price has changed over time). Then, it considers the correlations between stocks (i.e. how the prices of different stocks or sectors have moved relative to one another over time). During the process, the index provider applies a number of constraints to ensure the portfolio is sufficiently diversified and maintains the characteristics of the broad market. This is important in making sure the index isn t too heavily concentrated in one industry or country, which could create additional unintended risk. By looking at both the risk of each stock, and the risk of the portfolio as a whole, the index provider can target a reduced level of risk. Professional Quality Index Provider ishares has partnered with MSCI in developing its range of Minimum Volatility ETFs. MSCI is one of the world s largest and most wellestablished index providers, known as the gold standard for international investing. MSCI has a long history of devising innovative new indexes that reflect the constantly changing nature of financial markets. ishares [7]

10 FIGURE 4: THE CONSTRUCTION OF AN MSCI MINIMUM VOLATILITY INDEX STOCK SECTOR PARENT INDEX MSCI Emerging Markets PORTFOLIO OPTIMIZATION STYLE MINIMUM VOLATILITY INDEX MSCI Emerging Markets Minimum Volatility COUNTRY TURNOVER CONSTRAINTS STOCK LEVEL Min weight=0.05%/ Max weight 1.5% or 20 times the weight of the security in the parent index. SECTOR LEVEL Will not deviate more than +/-5% from the sector weights of the parent index. COUNTRY LEVEL If country weight >2.5% in parent index: will not deviate more than +/-5%. If country weight <2.5% in parent index: will be capped at 3 times their weight in the parent index. STOCK SECTOR TURNOVER One way turnover constrained to a maximum of 10%. STYLE No constraint applied to the Volatility risk index factor. Exposure to all other risk index factors will be restricted to +/-0.25 standard deviations relative to the parent index. Source: MSCI PARENT INDEX MSCI Emerging Markets PORTFOLIO OPTIMIZATION STYLE MINIMUM VOLATILITY INDEX MSCI Emerging Markets Minimum Volatility COUNTRY TURNOVER [8] Investor Guide to ishares Minimum Volatility Suite

11 Using ishares Minimum Volatility ETFs in Portfolios 4 Investors can use the ishares Minimum Volatility Suite of ETFs in a variety of ways to manage risk. In the example on the following page, you can see how a portfolio split 60:40 between stocks and bonds could have seen both reduced volatility and increased performance if the investor swapped out broad market exposure for a minimum volatility strategy. Since December 2009, the annualized volatility of the portfolio would have decreased from 8.1% to 5.8% and the annualized performance of the portfolio increased from 9.1% to 9.8% (see Figure 5). In this example, the Minimum Volatility portfolio would have maintained the same amount of stock exposure, but with increased return and reduced risk. Moreover, the reduced maximum drawdown and monthly loss figures could also have helped to avoid capital loss. DEFINITIONS Maximum Drawdown Maximum drawdown reflects the maximum fall from peak to trough over the period. Volatility Volatility, represented by standard deviation, measures how dispersed returns are around the average. A higher standard deviation indicates that returns are spread out over a larger range of values and thus, more volatile. Sharpe Ratio Sharpe Ratio is a measure of an investment s return per unit of risk. It is the investment s excess return relative to the risk free rate, divided by the investment s standard deviation. A higher Sharpe Ratio implies greater efficiency. ishares [9]

12 MSCI EM Minimum Volatility Index 40 % % Barclays US 15 Aggregate MSCI EAFE Minimum Volatility Index 40 % Figure 5: The ishares Minimum Volatility Suite Potential For Overall Reduction of Portfolio Risk MSCI USA Minimum Volatility Index 5 % 40 % MSCI EM Index BASE PORTFOLIO 40 % % Barclays US 15 Aggregate MSCI EAFE Index MSCI USA Index 5 % MINIMUM VOLATILITY PORTFOLIO MSCI EM Minimum Volatility Index 40 % % Barclays US 15 Aggregate MSCI EAFE Minimum Volatility Index 40 % MSCI USA Minimum Volatility Index 15 5 % MSCI EM Index BASE 9.1 % ANNUALIZED PERFORMANCE BASE PORTFOLIO 8.1 % ANNUALIZED VOLATILITY 1.1 % SHARPE RATIO -5.1 % MAXIMUM MONTHLY LOSS 40 % % Barclays US Aggregate MSCI EAFE Index -9.8 % MAXIMUM DRAWDOWN MINIMUM VOLATILITY 9.8 % ANNUALIZED PERFORMANCE 5.8 % ANNUALIZED VOLATILITY 1.6 % SHARPE RATIO -3.5 % MAXIMUM MONTHLY LOSS -3.8 % MAXIMUM DRAWDOWN 40 % MSCI USA Index Source: BlackRock, Morningstar and MPI Stylus. Portfolio inception date is 12/1/09, and the data shown is for 12/1/09-12/31/14. The portfolios rebalanced monthly. Sample portfolios are strictly for illustrative and educational purposes only, and do not represent a recommendation of any security or asset allocation strategy. Returns are hypothetical and are not representative of any funds or investments. Index data are for illustrative purposes only and do not represent actual ishares Fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. For actual ishares Fund performance, please visit or request a prospectus by calling iShares ( ). [10] Investor Guide to ishares Minimum Volatility Suite

13 Why ishares? 5 9 of 10 professional investors use ishares for their ETFs 5 With over 700 exchange traded funds (ETFs) globally and more than $1 trillion in assets under management 6, ishares helps clients around the world build the core of their portfolios, meet specific investment goals and implement market views. ishares ETFs make investing simple, easy and efficient for investors of all sizes Trusted ETF Leader ishares is the world s leading ETF provider, with more than a decade of expertise and commitment to investors. 7 Sustained Record of Performance ishares consistently delivers quality funds that clients globally rely on to invest for the future. 8 Powered by Blackrock ishares harnesses the insights and experience of Blackrock, trusted to manage more money for investors than any other firm in the world. 9 FIGURE 6: ishares AT A GLANCE 10 ASSETS UNDER MANAGEMENT NUMBER OF FUNDS GLOBALLY GLOBAL MARKET SHARE $1, ~40% BILLION 5 Source: 90% of all institutional investors (pensions, foundations and endowments; asset managers; insurance companies and investment advisors) surveyed in the 2014 U.S. Exchange Traded Funds Study by Greenwich Associates used ishares ETFs. Survey included 201 institutional investors already using ETFs, interviewed 2/2014-4/ As of December 31, Based on 717 ETFs and $1.03 trillion in assets under management globally as of 12/31/14. 8 ishares Index Funds seek to track the investment results of their underlying benchmark, less fees and expenses. Tracking error is a measure of how closely a Fund follows the index to which it is benchmarked. Over a three year period, as of 12/31/2014, 64% of global ishares Funds were within 25 bps and 82% were within 50 bps of their benchmarks, based on the Net Asset Value of the Funds. Past performance is no guarantee of future results. 9 Based on $4.65 trillion in assets under management as of 12/31/ Source: BlackRock, as of 12/31/14. ishares [11]

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15 Carefully consider the Funds investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds prospectuses and, if available, summary prospectuses, which may be obtained by visiting or BlackRock.com. Read the prospectus carefully before investing. Investing involves risk, including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets and in concentrations of single countries. The ishares Minimum Volatility ETFs may experience more than minimum volatility as there is no guarantee that the underlying index s strategy of seeking to lower volatility will be successful. The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications or other transactions costs, which may significantly affect the economic consequences of a given strategy. Transactions in shares of the ishares Funds will result in brokerage commissions and will generate tax consequences. ishares Funds are obliged to distribute portfolio gains to shareholders. There can be no assurance that and active trading market for shares of an ETF will develop or be maintained. The ishares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, BlackRock ). The ishares Funds are not sponsored, endorsed, issued, sold or promoted by MSCI Inc., nor does this company make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with the company listed above BlackRock. All rights reserved. ishares and BLACKROCK are registered trademarks of BlackRock. All other marks are the property of their respective owners. 3554_ISH_PRD_v02RG_4/15 Not FDIC Insured May Lose Value No Bank Guarantee ishares [13]

16 Want to know more? Call your financial advisor to talk about where ishares Minimum Volatility ETFs can fit in your portfolio. Visit ishares.com/minvol to learn more about the funds and how they work. Go to your online brokerage to purchase. Get insights on volatility at BlackRockBlog.com is