The allure of the volatility reduction via exchange traded funds has been confirmed in recent years by the success of funds such as the PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV) and the iShares MSCI USA Minimum Volatility ETF (NYSEArca: USMV).
A combined $7.4 billion in assets under management for those ETFs attests to their success, but equally worth noting is the efficacy of apply reduced volatility to international ETFs. With some global markets trading at compelling valuation discounts to the U.S., the time could be right for investors to revisit international low volatility ETFs, including the $263.1 million PowerShares S&P International Developed Low Volatility Portfolio (NYSEArca: IDLV).
IDLV has remained somewhat sturdy compared to Europe-focused ETFs because the PowerShares offering’s weight to Eurozone economies is relatively light. The ETF allocates a combined 11.2% of its weight to Germany, France and the Spain. Throw in the U.K., Sweden and Switzerland, and IDLV’s total Europe exposure is just over 26%. [International Low Vol ETF Stands Tall]
Since the start of the current quarter, IDLV is off 3%, but that beat the 5.5% loss for the Vanguard FTSE Europe ETF (NYSEArca: VGK) and the almost 5% shed by the iShares MSCI EAFE ETF (NYSEArca: EFA).
Although IDLV does not feature Japan exposure, the ETF does devote a combined 16% of its weight to AAA-rated Singapore and Hong Kong and the fund makes for a fine alternative to traditional EAFE index offerings. [Rush to Hong Kong ETFs]
“Valuation appears attractive. The MSCI EAFE Index is trading at a discount price/earnings ratio of about 1.25 versus the S&P 500 Index, and it has a dividend yield of 3.35% —more than triple the yield on a German one-year note,” according to the Invesco blog. Invesco (NYSE: IVZ) is the parent company of PowerShares.
Regarding dividend yield, IDLV is something of unheralded income play with a trailing 12-month yield of 3.06%, according to PowerShares data.
Of course, country weights explain part of IDLV’s dividend advantage. The ETF’s largest country weight is 25.9% to Canada and six of the ETF’s top-10 holdings are Canadian banks. Canadian banks have solid performers this year and in most cases, feature better yields and steadier dividend growth than their U.S. counterparts.
The U.K. and Australia, two of the largest ex-U.S. developed markets dividend destinations, combine for 23% of IDLV’s weight. [Lovely Australian Dividends]
“The price return ratio spread between the S&P 500 Index and MSCI EAFE Index is flirting with highs last seen in 1971 and 2000, and is moving toward the upper end of the range seen since 1970. Normalization in the spread relationship could suggest stronger relative performance for the MSCI EAFE Index,” according to Invesco.
That could indicate IDLV is heading toward a period of out-performance over U.S. stocks, particularly if investors seek dividend and low volatility advantages.
PowerShares S&P International Developed Low Volatility Portfolio
Tom Lydon’s clients own shares of EFA.