Ditching Volatility With Emerging Markets ETFs

This has been one of those years when the low volatility factor, as it applies to exchange-traded funds, is proving to be a better bet than traditionally-weighted funds. For example, the PowerShares S&P 500 Low Volatility Portfolio (PowerShares Exchange-Traded Fund Trust II (NYSE:SPLV)) is higher by 2.8 percent year-to-date, an advantage of 60 basis points over the S&P 500.

The Low Volatility Edge

Low volatility ETFs are not limited to the confines of U.S. borders, nor is the year-to-date performance advantage offered by these funds limited to U.S.-focused ETFs. When it comes to low volatility emerging markets ETFs, some of those products have topped their traditional counterparts, which is to say low volatility emerging markets ETFs have been less bad than their regular rivals.

Emerging markets ETFs were under pressure during the first nine months of 2015 on concerns about slower economic growth and the impact of pending actions by the Federal Reserve. But in October, emerging markets have been much stronger. For those who want to stay invested in this style, but reduce their potential risk, low volatility ETFs might be appealing.

Through a rules-based approach, the index the ETF seeks to track chooses the stocks that have recently exhibited the lowest volatility. But of course there are differences between these products that are worth understanding, said S&P Capital IQ in a new research note.

EEM And EEMV

The iShares MSCI Emerging Markets Minimum Volatility ETF (iShares Inc. (NYSE:EEMV)), the low volatility answer to the popular iShares MSCI Emerging Markets Indx (ETF) (NYSE:EEM), is down 3.9 percent this year. EEMV's loss, though nothing to brag about, is only half as bad as EEM's.

Low volatility in emerging markets usually means large weights to Malaysia, South Korea and Taiwan. Those countries combine for almost 38 percent of EEMV's weight, well above the roughly 31 percent EEM allocates to that trio.

The $2.85 billion EEMV holds 258 stocks in the broader MSCI emerging markets index that have below-average volatility. However, there are both sector and country bands that stay within 5 percent of the parent index at the semi-annual rebalance. The goal is to get a low volatility portfolio without introducing a potential concentration either by sector or country, noted S&P Capital IQ.

EEMV has a rival in the form of the PowerShares S&P Emerging Markets Low Volatility Portfolio (PowerShares Exchange-Traded Fund Trust II (NYSE:EELV)). EELV has trailed EEMV this year and a large part of that can be tied to EELV's 10.4 percent weight to struggling South African stocks, an allocation that is nearly 500 basis points above that of EEMV's South Africa weight.

Additionally, EELV's South Korea weight is just 4.7 percent. The ETF embraces low volatility via a combined weight of over 36 percent to Taiwan and Malaysia.

It is still too early to have a good read on when emerging markets will recover from the 2015 doldrums. However, we think a low volatility approach offers investors with a way to participate in the stronger growth prospects of emerging markets, while trying to reduce their risk profiles, said S&P Capital IQ.

EELV and EEMV charge 0.29 percent and 0.25 percent per year, respectively.

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