The EEMV ETF Smoothens Volatility for Skeptical Investors

Unlike pepperoni or sausage, emerging markets (EM) are like anchovies on pizza–they aren’t for everybody. Fortunately, for skeptical investors, there are exchange-traded fund (ETF) options that help smoothen volatility such as the iShares Edge MSCI Min Vol Emerging Markets ETF (BATS: EEMV).

EEMV seeks to track the investment results of the MSCI Emerging Markets Minimum Volatility (USD) Index. This particular index measures the performance of equity securities in global emerging markets that, in the aggregate, have lower volatility relative to the large- and mid-cap global emerging markets.

“Emerging-markets stocks carry more risk than their developed-markets counterparts. Political instability, poor corporate governance, and immature regulatory and legal systems can lead to volatility that may be difficult to stomach,” wrote Daniel Sotiroff in Morningstar. “A low-volatility strategy like iShares Edge MSCI Min Vol Emerging Markets ETF (EEMV) can take some of the edge off and should provide solid risk-adjusted performance over the long run. Its integrated approach to reducing volatility, well-diversified portfolio, and low fee earn the fund a Morningstar Analyst Rating of Silver.”

EEMV is a prime option for investors who want that emerging markets exposure, but don’t necessarily want the rollercoaster ride of volatility that could hit when geopolitical events or currency fluctuations trigger EM. For example, the coronavirus scare is certainly making current EM investors sick, but funds like EEMV help provide some degree of immunity.

“The fund tracks the MSCI Emerging Markets Minimum Volatility Index,” Sotiroff noted. “It uses an optimizer to select and weight stocks from the MSCI Emerging Markets Index in a way that minimizes expected volatility. This algorithm looks for companies with relatively low expected volatility while also considering how stocks behave relative to one another. Therefore, it can overweight volatile stocks if their low correlations are expected to reduce the portfolio’s overall volatility.”

“The optimizer is held to several constraints that promote diversification,” added Sotiroff. “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.”

In times like now, where markets are uncertain, EM investors understand they need exposure overseas to capture any future gains should the extended bull run in the U.S. run out of steam and EM picks up the slack since their economies are in different phases. With EEMV, it makes the EM pill easier to swallow–in fact, more like a chewable tablet.

“Low-risk strategies are attractive because they can provide a smoother ride than a market index,” Sotiroff said. “It should lag the MSCI Emerging Markets Index during rallies but hold up better when the market declines. 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.”

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