Investors who want exposure to emerging markets while avoiding elevated volatility can evaluate low-volatility exchange traded fund options.
For example, the iShares MSCI Emerging Markets Minimum Volatility ETF (NYSEArca: EEMV) and PowerShares S&P Emerging Markets Low Volatility Portfolio (NYSEArca: EELV) can provide a more conservative alternative to market capitalization-weighted emerging market ETFs as a way to reduce an investment portfolio’s overall volatility. [Get Defensive with Low Volatility ETFs]
“Low-volatility strategies seek to exploit the observed phenomenon that portfolios with smaller price fluctuations tend to outperform portfolios with larger price fluctuations over the long term,” writes Morningstar analyst Patricia Oey.
For instance, EEMV’s underlying index declined 42% in 2008 during the height of the financial crisis, whereas the MSCI Emerging Markets Index dropped 53%. EEMV’s benchmark index also showed a similarly lower dip in 2011, decreasing 6% compared to the MSCI index’s 18% fall.
The iShares ETF follows the 225 least volatile stocks, or those with minimum variance, from the MSCI Emerging Markets Index. The portfolio is rebalanced in May and November. EEMV has a 0.25% expense ratio. [More Evidence of a Return to Emerging Markets ETFs]
Top sector allocations include financials 26.9%, consumer staples 13.6% telecom services 11.9% information technology 11.2% and utilities 8.6%. Country weights include China 19.1%, Taiwan 16.3%, South Koreae 12.2%, South Africa 9.0% and Malaysia 8.6%.
Compared to the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), which tries to reflect the performance of the MSCI Emerging Markets Index, EEMV overweights consumer staples, utilities and health care – the more obvious defensive sector plays – while underweighting energy and materials.
Looking at country weights, EEMV has a noticeably lower weight in Brazil, Russia and South Korea, compared to EEM. Additionally, the low-volatility ETF leans toward Taiwan, Chile, Philippines and Malaysia.