“The US dollar has historically had a strong negative correlation to emerging market equities, which means a falling dollar may create a meaningful tailwind for commodity prices and commodity-related equities,” said PowerShares in a recent note. “In addition, a weaker dollar would likely boost economic and profit growth in the US, as well as stimulate cross-border lending by global banks as collateral pledged against local currency loans rises in value against the banks’ dollar-denominated liabilities. A weaker dollar also reduces the debt burden of many emerging market economies that often borrow in dollars to support local government spending. In other words, while violent currency moves tend to be disruptive, a moderately weaker dollar can benefit both domestic and global economic growth, in my view.”
EELV allocates about half its weight to Taiwan, Malaysia and South Korea, historically three of the least volatile emerging markets. Conversely, the ETF has scant exposure to Brazilian stocks and no exposure to India and Russia. Those are three of the least volatile emerging markets.
EELV, like other low volatility ETFs, focuses more more slow and stable companies, the low volatility strategy may underperform more growth-oriented stocks if the markets turn around.
The ETF devotes 46% of its sector weight to financial services stocks and consumer staples names while volatile energy and materials names combine for less than 9% of the fund’s roster.