Emerging markets stocks and exchange traded funds are scorching hot this year. So are ETFs dedicated to the low volatility factor. Fortunately, investors that still view emerging markets equities as a highly volatile asset class can marry developing world exposure with the low volatility factor.
The low or minimum volatility strategy targets stocks that have lower expected risk or less idiosyncratic risks. Specifically, the strategy targets equities that exhibit lower beta, a measure of volatility or systematic risk of a security to that of the overall market. Consequently, minimum volatility portfolios are constructed with stocks that exhibit lower market risk or beta.
The iShares MSCI Emerging Markets Minimum Volatility ETF (NYSEArca: EEMV), a low-vol variant on the widely observed MSCI Emerging Market Index, is a solid option for investors looking for a volatility-reducing strategy that provides exposure to resurgent developing world stocks.
Investors considering EEMV should note that is fund, like other low volatility ETFs, focuses more more slow and stable companies, the low volatility strategy may underperform more growth-oriented stocks if the markets turn around.
SEE MORE: Looking at Low Vol ETFs
That is the case this year as EEMV is trailing traditional emerging markets strategies. On the other hand, EEMV performed significantly less poorly than cap-weighted emerging markets funds when those ETFs declined over the past several years.
“However, emerging markets equities are rebounding this year and much of that resurgence is being driven by higher-beta markets such as Brazil and Russia. As a result, EEMV is up “just” 12.9% year-to-date, or 410 basis points less than the MSCI Emerging Markets Index,” according to InvestorPlace. “As a low-volatility emerging-markets ETF, it is not surprising that EEMV devotes over 28% of its combined weight to Taiwanese and South Korean stocks, as those are two of the least-volatile developing markets.”
The low-volatility factor investments work on the idea that they help cushion against market turns, limiting drawdowns that investors experience while providing upside potential. Consequently, the low- or min-vol strategies may produce better risk-adjusted returns over the long haul, which has been backed by extensive academic research.
SEE MORE: Slow-and-Steady ETFs for a Volatile Market
Supporting the low-vol performance, MSCI pointed to beta, the degree to which stocks tend to move in the same direction as the market, along with dividend yields. Low-vol ETFs have been strengthening this year as they limited downside risk when the markets slipped and strengthened on increased defensive bets during turbulent times.
For more information on the low-vol strategy, visit our low-volatility category.
iShares MSCI Emerging Markets Minimum Volatility ETF
