A Look at Vanguard’s Global Minimum Volatility Fund

This week, a reader wrote in asking about the Vanguard Global Minimum Volatility Fund that was launched in December 2013 — what it’s supposed to do, what it owns, and so on.

The fund is an actively managed stock fund. The fund’s investment strategy is to select stocks based on their individual volatility levels and correlation to each other, with the goal of delivering less overall volatility than a typical indexed stock portfolio.

What’s in the Portfolio?

Vanguard has stated that the plan is for the fund to have roughly half of its assets in U.S. stocks, and half in international stocks. And indeed, the fund currently has an allocation very close to that target.

The Global Minimum Volatility fund currently holds 241 stocks. While that’s not exactly a small number, it’s still far fewer than would be included in a typical broadly diversified index fund. For instance, a combination of Vanguard Total Stock Market Index Fund and Vanguard Total International Stock Index Fund would currently  include more than 9,000 stocks.

How Risky is the Fund?

On their “Risk Potential” meter, Vanguard rates the Global Minimum Volatility fund at 4/5, which is the same rating that they give the Vanguard Total Stock Market Index Fund. In other words, despite the low-volatility goal, it’s not as if Vanguard expects the new fund to be as safe as a bond fund. John Ameriks of Vanguard put it this way:

“You should not expect this fund to protect your principal in times of market downturns. We take a dim view of any stock fund that makes claims of safety from market loss or full downside protection. The objective of the fund is to deliver the least volatility that we can, subject to reasonable constraints on other important aspects of the portfolio. Zero volatility in times of market stress is not a reasonable expectation.”

Costs

The fund has an expense ratio of 0.30% (or 0.20% for Admiral shares, with a $50,000 minimum). There’s no ETF version of the fund.

My Personal Opinion

Given that we continue to be very happy with our simple one-fund solution, we won’t be adding the Global Minimum Volatility Fund to our portfolio.

But, frankly, even if we weren’t using an all-in-one fund, I still wouldn’t be inclined to add this fund to our portfolio, due to my general degree of pessimism about the value of active management. If I wanted to slightly reduce the risk level of my portfolio, I would simply adjust my stock/bond allocation slightly rather than moving a portion of my stock holdings into an actively managed stock fund that hopes to achieve lower levels of volatility than basic stock index funds.

That said, if I ever were to place a bet on active management, I would want to find a fund with rock-bottom costs, so as to minimize the hurdle that the fund managers have to overcome. And the cost of active management for this fund is much lower than that of most actively managed stock funds.