• Beta Analysis: If terms of beta, it is true that MSCI EM Min Vol and S&P EM Low Vol do in fact have the lowest betas of the indexes shown. This is their stated goal—to have relatively lower volatility while still providing exposure to the performance of emerging market equities.
• Volatility Focus Yields Above-Market Price-to-Earnings (P/E) Ratios: The median P/E ratio of MSCI EM is 12.3x, while the volatility-focused indexes all have a median P/E ratio of 13.9x. This essentially gives us an idea: If one were to marry a value index with a volatility-focused index, there could be the potential for a lower beta than that of the value focus as well as a lower median P/E ratio than that of the volatility focus. An added bonus could also be a higher potential dividend yield than for the volatility focus.
• Volatility Focus Yields Relatively High PEGY Ratios: This ratio is a tool with which one can relate the current P/E ratio to the sum of the long-term earnings growth expectations as well as the current dividend yield. WTEMDG, with its high median long-term earnings growth expectations and moderate median dividend yield, looks least expensive by this metric. Both MSCI EM Min Vol and S&P EM Low Vol have relatively higher PEGY ratios because their focus on potentially lowering volatility has led them to stocks with higher median P/E ratios but which don’t necessarily make up for this with high median long-term growth expectations or high median dividend yields.
• Volatility Focus Yields Below-Market Long-Term Earnings Growth Expectations: The long-term earnings growth expectations for the MSCI EM are 13.3%, which is above both the MSCI EM Min Vol and the S&P EM Low Vol indexes. Similar to what we mentioned above, another blend idea could be to combine a growth focus with a volatility focus, if in fact higher potential earnings growth expectations are desired than those accessible with a volatility focus alone.
Conclusion: Complementarity of Fundamentals and Volatility-Focused Approaches
Volatility-focused indexes are great additional tools to consider when thinking about emerging market equities, but no index or methodology can do all things simultaneously. While market capitalization-weighted indexes may be the proverbial blunt instruments, the genesis of new index methodologies allows for indexes to progress further down the path of being precision tools through which to monitor different economic approaches.