Historically, emerging markets equities are more volatile than developed market equivalents and with the asset class beckoning this year, conservative investors may want to explore volatility-reducing strategies such as the iShares MSCI Emerging Markets Minimum Volatility ETF (Cboe: EEMV).
EEMV is 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.
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.
“Low-risk strategies are attractive because they can provide a smoother ride than a market index. It should lag the MSCI Emerging Markets Index during rallies but hold up better when the market declines,” said Morningstar in a note out last Friday. “This should outweigh the upside it sacrifices in bull markets and lead to better risk-adjusted performance over the long haul. The portfolio’s focus on stocks with low correlations also contributes to reducing risk without necessarily hurting returns.”
Low volatility ETFs might be in the back of investors’ minds, especially when the markets continue to roar to new record highs in the current extended bull market. However, investors should keep these funds on their radar in the event volatility does strike or worse, a sharp downturn sends the markets in a daze. Including an optimize, EEMV has some other perks investors should acknowledge.
“The optimizer is held to several constraints that promote diversification,” according to Morningstar. “Individual stocks get capped at 1.5% of the portfolio, while country and sector weights are held within 5% of their weight in the parent index. This strategy also limits turnover to 10% at each semiannual rebalance to help rein in trading costs.”
Another advantage is that over the long haul, EEMV can actually deliver returns that are on par with or superior to traditional cap-weighted strategies.
“But over long investment horizons, funds like this one have outperformed their market-cap-weighted counterparts on a risk-adjusted basis,” said Morningstar. “This suggests that the reduction in risk outweighs the impact of potentially lower returns.”
Morningstar has a Silver rating on EEMV.
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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.