Experienced investors know emerging markets equities are usually more volatile than their developed markets counterparts. Dating back to last year, investors are getting that message, thanks in large part to China.
This year, it’s Russia that’s adding unnecessary turbulence to the emerging markets equity complex. However, there are ways for investors to remain engaged with this asset class while limiting volatility. Enter the Invesco S&P Emerging Markets Low Volatility ETF (EELV).
EELV, which turned 10 years old earlier this year, follows the S&P BMI Emerging Markets Low Volatility Index. That index is comprised of the 200 least volatile stocks over the trailing year in the S&P Emerging Plus LargeMidCap Index. If that methodology sounds familiar, that’s because it’s what’s used by a variety of domestic low-volatility exchange traded funds issued by Invesco. Past performance doesn’t guarantee future returns, but EELV’s index has compelling history on its side.
“By losing less when markets fall, low volatility strategies have typically outperformed over the long run. This phenomenon is observable universally across markets. The resulting performance pattern is captured in Exhibit 2, which shows the relative performance of the S&P BMI Emerging Markets Low Volatility Indexm against the monthly performance of the S&P Emerging Plus LargeMidCap,” says Fei Mei Chan of S&P Dow Jones Indices.
EELV is living up to its objective of skirting volatility and generating decent performance in the process. Over the past year, the ETF is up more than 10% while the MSCI Emerging Markets Index is lower by 14.09%.
“In times of high stress, low volatility strategies tend to have more bandwidth to offer a buffer against volatility. This has proven to be true in the case of the S&P 500 and S&P 500 Low Volatility Index so far in 2022, declining 4.6% and 1.7%, respectively,” adds Chan. “It has been even more impactful in the case of emerging markets, where conditions are innately more volatile. In the first quarter of 2022, the S&P BMI Emerging Markets Low Volatility Index outperformed its underlying index by 11.3%.”
Just as sector allocations are relevant with domestic low-vol strategies, geographic exposures are meaningful with an ETF such as EELV. As of April 1, the fund allocates more than 36% of its weight to Taiwan and Thailand and has a high oil price kicker by way of a 10.23% weight to Saudi Arabia. Conversely, EELV devotes just 9% of its roster to Chinese equities and has no exposure to Russia.
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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.
