How to Reduce International Equity Volatility | ETF Trends

Although stocks are soaring this year, the low volatility factor has been all the rage for many investors. Investors eyeing more upside for ex-US stocks in the new year ought to remember low volatility’s benefits extend to international markets, too.

The Invesco S&P International Developed Low Volatility Portfolio (NYSEArca: IDLV) is an ETF that can help investors gain low volatility protection while reaping potential rewards with international equities.

IDLV, which turns eight years old next month, follows the S&P BMI International Developed Low Volatility Index. That benchmark “measures the realized volatility of the Index’s 200 constituents over the trailing 12 months and weights constituents so that the least volatile stocks receive the highest weights,” according to Invesco.

“IDLV directly targets stocks that are more stable than the market. It starts with all companies in the S&P Developed ex-U.S. & South Korea LargeMidCap Index and sorts them by their volatility over the prior 12 months,” said Morningstar in recent research piece. “The index then selects the 200 least volatile names for the portfolio and weights them by the inverse of their volatility. This weighting approach causes the portfolio to emphasize its least-risky names, but it can also lead to higher turnover and trading costs than a market-cap-weighted index.”

Inside IDLV’s Holdings

IDLV holds nearly 200 stocks, nearly 42 of which are Canadian or Japanese. Singapore and Australia combine for over 14% of the fund’s geographic exposure.

Extensive research has gone over the so-called low-volatility anomaly. As a more conservative strategy, low-volatility investments are expected to provide investors with smaller swings and more boring returns. However, the strategy has historically outperformed with higher risk-adjusted returns.

IDLV, like other low volatility ETFs, is designed to be sector agnostic, but it does feature some sector-level concentration as real estate and financial services names combine for 51.50% of the fund’s roster.

“So far, this strategy has delivered on its low-volatility objective,” notes Morningstar. “From its launch in January 2012 through November 2019 its standard deviation has run about 15% lower than the S&P Developed ex-U.S. Broad Market Index. It also held up better during drawdowns. The market index declined by 18.6 percentage points between February and December 2018 while the fund shed only 11.2% over that period. IDLV’s 0.25% fee is lower than most funds in Morningstar’s foreign large blend category.”

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.