Reducing equity market volatility via exchange traded funds has proven to be a popular concept. Importantly, it is not limited to U.S. markets. Some ETFs help investors reduce volatility in ex-US markets, including developing economies.
Investors looking for a less volatile approach to emerging markets exchange traded funds have some options to consider, including 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.
EEMV “uses an optimizer to construct the least-volatile portfolio possible using constituents of the MSCI Emerging Markets Index under a set of constraints,” according to Morningstar. “The optimizer takes into account each stock’s volatility and how they interact with each other to affect the portfolio’s volatility. It uses this information to select and weight stocks from the parent index. However, the fund limits sector and country tilts relative to the MSCI Emerging Markets Index, exposure to individual names, and turnover, which reduces transaction costs. These constraints reduce the fund’s style purity, but they also allow investors to use this as a core holding.”
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.