Minimum-volatility ETFs are officially in vogue.
Factor-based investing — the strategy of buying stocks or funds based on characteristics like quality or low risk — has been gaining traction this year as investors navigate uncertainty around U.S.-China trade relations and Federal Reserve policy.
Low-volatility exchange-traded funds in particular have attracted some $25 billion in inflows, according to ETF.com, signaling that investors are getting more comfortable with slicing-and-dicing their holdings in hopes of creating a better risk profile.
Holly Framsted, BlackRock iShares' head of U.S. factor ETFs and the woman behind USMV, told CNBC's "ETF Edge" on Monday that the popularity has exceeded even her expectations.
"We've been talking with investors really all year about building resilience into their portfolio, and so quality and minimum-volatility investments have been particularly popular," Framsted said. "USMV is a standout iShares ticker there. It's actually the fastest-growing ETF globally this year, which is remarkable given that it's not market-cap weighted."
To Framsted, that's a clear indication that "factors have become mainstream." USMV, which iShares says aims to reduce downside risk, holds 212 stocks in an equal-weighted structure, with Newmont Goldcorp, Coca-Cola and Visa's stocks as the three largest weightings.
"Our portfolio in particular aims to balance exposure across sectors and industries, and so, as a result, we're investing in some high-volatility stocks and some low-volatility stocks to the extent that they diversify one another. So, really, we're delivering in USMV a portfolio that is designed to drive market-like returns over time, but with substantially less risk taking advantage of correlation," Framsted explained.
The way she sees it, factor investing isn't a new phenomenon; people are just warming to it as they realize it's worth missing out on potential stock-market gains if it means opting out of major drops.
In other words, the risk of missing out on some upside is "probably far lower than the risk of participating fully on the downside if you're not positioned defensively," Framsted said.
That's why investors are choosing low-volatility and quality-focused funds, the ETF expert explained.
"Think about buying companies that are underpriced relative to their fundamental value. That's value investing. Buying companies with strong balance sheets and stable earnings is quality investing," she said Monday.
"These investment characteristics are embedded in things that we already own, so all that has really changed is that the ETF structure has democratized access to these drivers of return, and improvements in technology and measurement have allowed investors to now see what they own and understand what's driving their portfolio over time, which has really helped ... with defensive positioning," Framsted said. "It's helped investors understand how to shift allocations in their portfolio in an environment that has been quite uncertain."
USMV lost less than 1% in Friday's trading session.