Key takeaways

• Today’s U.S. equity market can be characterized by a few words: top-heavy, volatile, and reactive.

• A volatile market environment can drive investors to abandon their asset allocations, potentially jeopardizing their long-term goals.

• For investors looking to build resilient portfolios that can endure volatility, we believe Minimum Volatility ETFs provide several unique benefits.

2025 has brought new challenges for investors, including a sharp escalation in trade protectionism by the U.S. through its reciprocal tariff program. The current market environment appears to point to more volatility to come, and potential pressure on U.S. equities. Volatility can drive investors to abandon their asset allocations and potentially jeopardize their long-term goals. The challenge is clear: how do you reduce downside exposure without walking away from equity returns?

We believe there are several unique benefits to Minimum Volatility (Min Vol) investing in today’s market environment:

1. Seek to outperform in volatile markets

Minimum Volatility (Min Vol) strategies aim to reduce the overall risk in a portfolio by focusing on stocks that have historically exhibited lower volatility. Historically, these strategies have demonstrated resilience in turbulent markets. As illustrated in Figure 1, the MSCI USA Min Vol Index has outperformed the broad market benchmark, the S&P 500 Index, particularly during periods when the S&P 500 delivered negative or single-digit returns. While navigating uncertain market conditions, we believe Min Vol is an attractive investment option while maintaining exposure to equities.

Figure 1: MSCI USA Minimum Volatility Index’s outperformance over S&P 500

Figure 1: MSCI USA Minimum Volatility Index’s outperformance over S&P 500

Average Min Vol vs. S&P 500 outperformance during respective periods

_{Source: BlackRock, Morningstar, MSCI. Based on monthly index returns from 11/1/2011 – 4/30/2025. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Index performance does not represent actual iShares Fund performance. Past performance does not guarantee future results.}

2. Diversification away from Magnificent Seven

MSCI Min Vol Indexes impose an individual stock cap of 1.5% to help mitigate stock-specific risks. Currently, the MSCI USA Min Vol Index has approximately 3% exposure to the Magnificent Seven¹, while the S&P 500 Index has over 30% exposure.²

The reduced concentration in the Magnificent Seven can help investors seek to mitigate the volatility these mega-cap stocks may incur. For example, when Chinese Artificial Intelligence company DeepSeek released their first model on January 27, 2025, AI-driven semiconductor stocks like NVIDIA sold off aggressively. This significantly impacted indexes with large concentration in these stocks. Figure 2 shows that the S&P 500 returns have dragged as its top names experiencing drawdowns, while the MSCI USA Min Vol Index delivered positive returns year-to-date.

Figure 2: YTD Performance of the iShares MSCI USA Min Vol Factor ETF, S&P 500 and Magnificent Seven

Figure 2: YTD Performance of the iShares MSCI USA Min Vol Factor ETF, S&P 500 and Magnificent Seven

_{Source: Bloomberg as of 5/15/2025. Index performance is for illustrative purposes only. Index performance does 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.}

3. A potential stagflation winner

With U.S. growth projected to slow and inflation potentially rising³, investors may consider what has been the best performing style factor in similar periods historically as they think through positioning their portfolios. Between 1970 and 1985 — the last prolonged period of stagflation — not surprisingly, low volatility exhibited the strongest outperformance relative to other factors. It had an annualized return of 13.8% relative to the equity market return of 2.2%. ⁴

Minimum Volatility – A Strategic Allocation

Investors are often caught between a rock and a hard place. One of the potential challenges a long-term investor may face is seeking downside protection in bad years, while the challenge defensive investors likely face is seeking better upside on good years. Minimum Volatility aims to thread the needle between both market environments by seeking to provide attractive asymmetrical returns across a full market cycle. It’s similar to a slow and steady tortoise in a race, aiming for consistent progress instead of flashy sprints.

As a rewarded factor, Minimum Volatility has existed for a reason. Academic research has found that less volatile stocks have outperformed their more volatile peers over time.⁵ The “lottery effect” is one explanation why this occurs – some investors prefer riskier companies for a greater payout and end up overlooking less risky companies over time. At its core, Minimum Volatility has one main objective – to seek to decrease risk in portfolios while maintaining equity exposure.

Conclusion

Today more than ever, investors may need a noise-cancelling equity strategy to stay invested. We believe Minimum Volatility is positioned to deliver equity market returns while dampening equity market risk. It may be especially valuable in a world where markets are top-heavy, volatile, and reactive. It’s not about beating markets – it’s about building portfolios that endure them.

_{Management fees: as disclosed in the fund’s most recent prospectus or ETF summary document.}