The low volatility factor is one of the most accessible and popular factors in the world of exchange traded funds. Low volatility’s popularity and utility are not limited to U.S. stocks.In fact, there are avenues for investors to trim volatility with emerging markets equities.
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.
“If you are looking for a emerging-markets fund, this Silver-rated ETF is one to consider. It offers a well-diversified, low-cost portfolio that should provide a smoother ride and better risk/reward profile than most of its peers in the category. To achieve that, the fund uses an optimizer to construct the least-volatile portfolio possible using constituents of the MSCI Emerging Markets Index under a set of constraints,” said Morningstar in a recent note.
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.
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.
EEMV also “limits sector and country tilts relative to the MSCI Emerging Markets Index, exposure to individual names, and turnover, which reduces transaction costs. The resulting portfolio is well-diversified, with more than 250 holdings, and top holdings include companies with more stable fundamentals than the typical constituent of the MSCI Emerging Markets Index. Though investors should expect it to lag in strong market rallies, it will likely hold up better than peers in weaker markets.”
For more information on the low-vol strategy, visit our low-volatility category.