The low volatility factor is an investor favorite and one that is widely represented in the world of exchange traded funds. That includes international ETFs, such as the iShares Edge MSCI Min Vol EAFE ETF (CBOE: EFAV).
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.
EFAV tracks the MSCI EAFE Minimum Volatility (USD) Index, a low volatility answer to the widely followed MSCI EAFE Index.
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 fund attempts to create the least-volatile portfolio possible with large- and mid-cap stocks listed in developed markets in Europe, Australia, and Asia under a set of constraints,” according to Morningstar. “These include limiting sector and country tilts relative to the MSCI EAFE Index, which improves diversification. This strategy doesn’t just target the least-volatile stocks. It also takes into account each stock’s exposure to common risk factors and how they interact with each other to affect the portfolio’s overall volatility.”
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EFAV holds nearly 240 stocks, about 43% of which, on a combined basis, hail from Japan and the U.K. Switzerland and Hong Kong combine for 21.6% of EFAV’s weight.
“So far, the fund’s approach has worked well. From November 2011 through August 2017, it exhibited 22% less volatility than its parent index,” said Morningstar. “And it outpaced the benchmark by 1.6 percentage points annualized during that time. This was primarily thanks to more-favorable stock exposure within several sectors rather than differences in sector weightings.”
EFAV is up 19.2% year-to-date. The ETF allocates a third of its combined weight to financial services and consumer staples stocks. Industrials account for 15.4%.
Investors looking for a cost-effective option for EAFE exposure can consider the iShares Core MSCI EAFE ETF (NYSEArca: IEFA). One of this year’s top asset-gathering ETFs, IEFA charges just 0.08% per year, or $8 on a $10,000 investment.
For more on Smart Beta ETFs, visit the Smart Beta Channel home page.