Many investors like the idea of removing some of the volatility from the emerging markets equity trade, but leaving returns on the table is not appealing.
However, the PowerShares S&P Emerging Markets Low Volatility Portfolio (NYSEArca: EELV) is impressing with a year-to-date return of more than 13%.
Now more than five years old, EELV is one of the most venerable names among emerging market low volatility exchange traded funds, a fact confirmed by its more than $252 million in assets under management. EELV tracks the S&P BMI Emerging Markets Low Volatility Index, which is a collection of the 200 stocks from the S&P Emerging BMI Plus LargeMid Cap Index with lowest trailing 12-month volatility.
Extensive research has gone over the so-called low-volatility anomaly. As a more conservative strategy, low-volatility investments are expected to provide investors with smaller swings and more boring returns. However, the strategy has historically outperformed with higher risk-adjusted returns.
The weaker dollar could be helping EELV and emerging markets stocks this year.
“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.