Low-Volatility ETFs for Emerging Markets
February 13th 2013 at 2:10pm by Tom Lydon
Low-volatility emerging market exchange traded funds have caught investors’ attention as a way to get exposure to this notoriously capricious asset class.
Specific country allocation is important when considering these funds, since the ETF portfolios can look different depending on the individual strategy of the low-volatility fund.
“The low or minimum volatility ETFs seem to be a winning combination to investors as many are understandably queasy after all the market turmoil the last several years. Typically the conventional emerging market funds can be more volatile and these products seek to minimize some of the drama with their respective security selection methodologies,” John Peter of DividendETFList.com wrote for Seeking Alpha. [ETF Spotlight: Low-Volatility, Emerging Market Dividends]
One of the most important areas to mind with low-volatility emerging market ETFs is the country allocation. This can impact the performance of an ETF. Furthermore, what a fund manager classifies as “emerging” may vary from one to another. Other factors that impact performance are currency fluctuations and geopolitical risk. [Best Emerging Market ETFs]
The EGShares Low Volatility Emerging Markets ETF (NYSEArca: HILO) has just 30 holdings and has an expense ratio of 0.85%. The yield is much higher as expected, chugging in at around 5.2%. The assets under management are $87 million. The top three countries are South Africa, Turkey and China.
PowerShares S&P Emerging Markets Low Volatility Portfolio (NYSEArca: EELV): The top countries represented in the portfolio include South Africa, Malaysia and Taiwan. The yield of 1.03% comes with a market cap of $101 million. The cost is 0.29% and the portfolio consists of 201 stocks.
The iShares MSCI Emerging Markets Minimum Volatility Index (NYSEArca: EEMV) features Taiwan, China and South Korea as top holdings. Some critics claim that South Korea has reached developed status, and in response, some providers may reduce exposure to this country in emerging funds. The fund costs 0.25% and has a yield of 1.7%. The market cap of over $1 billion indicates the popularity of the ETF. [Where to Find Yield in ETFs with Less Risk]
Country allocation is important because it will indicate what type of risk the ETF is up against. Also, investors can avoid over-allocation to a specific country or region and this alone can cut down risk.
Tisha Guerrero contributed to this article.
Story updated to correct expense ratio for EELV.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.