Low volatility ETFs are getting plenty of attention in the U.S. these days and rightfully so, but that investment factor has worthy applications beyond just U.S. stocks. The iShares Edge MSCI Min Vol EAFE ETF (CBOE: EFAV) confirms as much.
EFAV “seeks to track the investment results of an index composed of developed market equities that, in the aggregate, have lower volatility characteristics relative to the broader developed equity markets, excluding the U.S. and Canada,” according to iShares.
When markets are oscillating the way they have been the past week, a value-oriented tilt is necessary. With the S&P 500 containing stocks that skew towards growth and momentum, this can make the index more prone to wild market swings. While low volatility strategies are designed to perform less poorly when markets swoon, not to outperform when stocks surge, it’s notable that EFAV is outperforming the traditional MSCI EAFE Index by a healthy margin this year.
With volatility on the rise and struggling developed markets equities looking inexpensive relative to U.S. benchmarks, investors considering international exposure may want to evaluate a low volatility approach, such as EFAV.
Examining EFAV’s Impact On Different Sectors
An essential element with EFAV is its sector mix, diversification, and ability to reduce correlations at the sector level.
“What they really do in that fund is they look for stocks that have low volatility, but then they’ll also sort of fold in this correlation component,” said Morningstar in a recent note. “So, they will look for stocks that have low correlations with each other. So, if you’re looking at the individual holdings in that fund, you may see some, like, very volatile mining companies that pop up every now and then. Again, that’s more of a play on the correlations. The objective here is reducing the volatility of the overall portfolio.”
EFAV’s three-year standard deviation is below the comparable metric on the MSCI EAFE Index and the S&P 500.
“The other advantage that fund has is it really maintains diversification very well. So, they limit the percent of assets that can be allocated to a single stock, and they also control their sector weighting,” according to Morningstar.
For more on core investing strategies, please visit our Core ETF Channel.