Turmoil in capital markets has been unrelenting since the tariff shock on April 2, even after reciprocal tariffs were paused for 90 days. Substantial uncertainty remains, demonstrated by higher implied volatility across global equity markets, with implied volatility in the U.S. and EAFE recently hitting the highest levels since the start of the COVID-19 pandemic.[1] The traded volume in futures linked to the MSCI World Minimum Volatility Indexes has jumped significantly as investors seek ways to cushion their portfolios in this environment.
Our previous research showed allocations to the MSCI Minimum Volatility Indexes helped reduce equity drawdowns in high-volatility market regimes. Here, we examine the strong performance of the MSCI Minimum Volatility Indexes after early April’s tariff surprise, informed by MSCI Economic Exposure data. We also compare the indexes’ recent resilience with their behavior during past periods of market stress.
As implied volatility soared, min vol outperformed
The MSCI Minimum Volatility Indexes have typically performed well during periods of elevated market volatility and drawdowns, true to their aim of reducing risk while maintaining exposure to equity markets by capturing the low-volatility factor premium.
In early April, as volatility spiked, the MSCI World Minimum Volatility, MSCI USA Minimum Volatility and MSCI Emerging Markets Minimum Volatility Indexes outperformed their respective parent indexes. The degree of outperformance tracked closely with the rise in implied-volatility index levels, based on the VIX Index in developed markets (DM) and the VXMXEF Index in emerging markets (EM).
The low-volatility factor delivered in DM and EM as tariffs rose
This is an interactive exhibit that compares the relative performance of the MSCI World Minimum Volatility, MSCI USA Minimum Volatility and MSCI Emerging Markets Minimum Volatility Indexes and their respective parent indexes with the performance of the relevant regional volatility index. For all regions, in the first two weeks of April when market volatility rose due to tariff uncertainty, minimum-volatility strategies outperformed the broader equity market in both developed and emerging markets.
Min-vol indexes’ economic exposure helped performance
The performance edge that min-vol indexes have had in choppy markets primarily arises from having a lower beta than the parent index as well as the core index construction methodology. Additionally, we found the regional economic exposures of the MSCI Minimum Volatility Indexes appeared to steady them in the wake of higher tariffs.
As of March 31, 2025, the MSCI World Minimum Volatility and MSCI USA Minimum Volatility Indexes had higher economic exposure to the U.S. (spreads of 12% and 8%, respectively) and lower exposure to China (4% and 3%, respectively) than their parent indexes.
In contrast, the MSCI Emerging Markets Minimum Volatility Index had lower U.S. (4%) and China (8%) exposures than its parent. The lower exposure of the two DM min-vol indexes to China, and the lower exposure of the EM min-vol index to the U.S. and to China, could have helped insulate them from the negative market impacts of Chinese- and U.S.-imposed tariffs, respectively.
Lower foreign exposure enhanced min-vol indexes’ resilience
This exhibit is an interactive stacked bar chart that compares the economic exposures of the MSCI World Minimum Volatility, MSCI USA Minimum Volatility and MSCI Emerging Markets Minimum Volatility Indexes and their respective parent indexes.
To quantify the effect of economic exposure on returns, we grouped the constituents of the MSCI World Minimum Volatility and MSCI USA Minimum Volatility Indexes into quintiles based on their economic exposures to China and to the U.S. at the end of Q1 2025. For each quintile, we calculated the median security’s month-to-date weighted return as of April 15, 2025, and the total index weight as of March 31, 2025.
We found that the stocks most exposed to China (quintile 5) had the steepest losses over these two weeks and also accounted for the largest weight in the index.
But U.S.-imposed tariffs should also impact DM-domiciled firms. We found that the firms with the lowest economic exposure to the U.S. made the highest positive contribution to the indexes’ returns over the same two-week period ending April 15.
And stocks with higher foreign exposure had steeper losses
This bar chart is interactive and shows the median security’s month-to-date weighted return (denoted by a gold star) in each quintile, grouped by exposure to China and the U.S. for the MSCI World Minimum Volatility and MSCI USA Minimum Volatility Indexes.
The x-axis is divided into 5 quintiles, each representing a group of stocks sorted by increasing exposure to China (from low to high). Y-axis on the left shows weighted return in percentage terms. Y-axis on the right shows total weight of stocks in each quintile as a percentage of the index (10% to 30%).
Today’s resilience is consistent with past min-vol performance
To put the short-run, post-tariff-shock performance in context, we analyzed the world, U.S. and EM min-vol indexes during prior high-volatility regimes.[2] The MSCI World Minimum Volatility Index delivered an average active monthly return of 0.25% in periods when volatility was high, the MSCI USA Minimum Volatility Index an average active monthly return of 0.13% and the MSCI Emerging Markets Minimum Volatility Index an average active monthly return of 0.54%.
Over nearly 25 years, min-vol indexes have outperformed
This is an interactive exhibit. It is a long-term dual-axis line graph that illustrates the relative performance of the respective regional MSCI minimum-volatility (min-vol) index versus its parent index and its relationship to market volatility over a 25-year period. Over multiple major market cycles and crises in the past 25 years, minimum-volatility indexes consistently outperformed their broader market counterparts, especially during periods of elevated volatility and economic uncertainty.
A closer look at past key market-stress events shows a similar pattern of resiliency by the min-vol indexes. The MSCI World Minimum Volatility, MSCI USA Minimum Volatility and MSCI Emerging Markets Minimum Volatility Indexes consistently outperformed during the systemic market sell-offs caused by the 2008 global financial crisis (GFC), COVID-19 crash and start of the Federal Reserve’s rate-hiking cycle in 2022.
Min-vol strategy successfully navigated past key stress events
Defense could be the best offense if uncertainty persists
With tariff uncertainty persisting and its potential economic impact growing, the risks of a prolonged equity drawdown are elevated. Defensive strategies associated historically with lower equity-market drawdowns — such as capturing the low-volatility-factor premium — could play a key role as investors seek to mitigate market volatility while maintaining diversified equity exposure.