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 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.
EFAV “limits individual stock weightings to 1.5% of the portfolio and holds country and sector weightings to 5% of the parent index weighting,” said Morningstar in a recent note. “These constraints promote diversification while controlling active risk but can limit the fund’s style purity. It also imposes turnover limits to rein in trading costs. The final portfolio holds less than 30% of the stocks in its parent index, but it is still well-diversified.”
Exploring EFAV ETF
EFAV, which is over seven years old, holds 273 stocks and has three-year standard deviation of 8.74%, well below the MSCI EAFE Index. The fund allocates over 42% of its weight to Japanese and Swiss stocks. The U.K. and Hong Kong combine for 21.40% of EFAV’s geographic exposure.
At the sector level, consumer staples and financial services names combine for about 32% of EFAV’s weight while the healthcare and industrial sectors combine for almost 28%.
“While the fund constrains its sector weightings, there is some wiggle room, so it still makes some modest sector bets,” according to Morningstar. “It has had a persistent overweighting in firms from traditionally stable sectors like consumer staples and utilities, while underweighting those from more volatile sectors like technology and energy.”
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Since inception, EFAV has proven adept at reducing risk.
“The fund’s approach has successfully achieved its goal of reducing risk. From its launch in October 2011 through June 2018, its volatility was 23% lower than the MSCI EAFE Index, allowing its risk-adjusted returns to easily beat this same bogy,” said Morningstar. “Its 0.20% expense ratio is another attractive feature. This fee ranks among the lowest in the foreign large-blend Morningstar Category and provides the fund with a sustainable advantage over its more expensive competitor.”
EFAV earns a Morningstar rating of Silver.
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