An Idea for Trimming Emerging Markets Volatility
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.
Investors considering EEMV should note that is fund, 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 low-volatility factor investments work on the idea that they help cushion against market turns, limiting drawdowns that investors experience while providing upside potential. Consequently, the low- or min-vol strategies may produce better risk-adjusted returns over the long haul, which has been backed by extensive academic research.
“As a low volatility fund, EEMV has a smaller roster than traditional emerging markets ETFs with just under 270 stocks. The low volatility requirement also leads to some differences at the country level with China, Taiwan and South Korea combining for 52% of the fund’s weight,” reports InvestorPlace.
Likewise, EEMV also trims allocations to some of the more volatile emerging economies.
“Conversely, EEMV has light or no allocations to some of historically higher beta emerging markets. For example, Brazil is EEMV’s smallest country weight and the fund features no exposure to Russian stocks,” according to InvestorPlace.
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.
Investors considering EEMV should note that is fund, 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 rally.
That is the case this year as EEMV is trailing traditional emerging markets strategies. On the other hand, EEMV performed significantly less poorly than cap-weighted emerging markets funds when those ETFs declined prior to 2016.
For more information on the low-vol strategy, visit our low-volatility category.