Low-Volatility ETFs for Emerging Markets
March 24th at 6:31am by Tom Lydon
Low-volatility ETFs have been a hit with investors and could make even more sense for emerging markets, which are known for their higher risk and jarring price swings.
With the growing interest for managing risk, investors may consider low-volatility emerging market strategies, like the iShares MSCI Emerging Markets Minimum Volatility ETF (NYSEArca: EEMV) and the PowerShares S&P Emerging Markets Low Volatility Portfolio (NYSEArca: EELV), writes Morningstar analyst Patricia Oey. [iShares: Don’t Forget About Emerging Market ETFs]
While the iShares and PowerShares funds may seem similar, they are constructed differently. EEMV’s index tries to create a portfolio with the lowest volatility through 200 holdings from the MSCI Emerging Market Index. EELV is a low volatility portfolio that selects the 200 least volatile stocks out of the S&P Emerging BMI Plus LargeMidCap Index and weights holdings by the inverse of its volatility. [ETF Focus: Emerging Markets]
Compared to EEMV, EELV does not include sector or country constraints on weightings. The PowerShares fund has also been underweight energy and tech companies while overweighting defensive utilities and consumer staples.
The low-volatility emerging market ETFs have seen lower volatility over the last five years relative to the MSCI Emerging Markets Index. For instance, in the 2008 crisis, EEMV’s and EELV’s benchmark indices dropped 42% and 34%, respectively, compared to the 53% decline in the MSCI Emerging Markets Index.
“Taking some of the sting out of market sell-offs may lead to improved returns, as investors may be less likely to sell during bear markets if these strategies’ drawdowns are relatively smaller,” Oey said. “Conversely, these strategies likely will underperform during strong bull markets.”
Investors can also capitalize on the better risk-adjusted returns.
“In practice, low-volatility strategies historically have generated better risk-adjusted returns relative to their corresponding cap-weighted indexes over the long term,” Oey added.
For more information on the emerging markets, visit our emerging markets category.
Max Chen contributed to this article.
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.