Risk-Reducing Emerging Markets ETF Opportunity

This article was originally published on ETFTrends.com.

Reducing equity market volatility via exchange traded funds has proven to be a popular concept. Importantly, it is not limited to U.S. markets. Some ETFs help investors reduce volatility in ex-US markets, including developing economies.

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.

EEMV “uses an optimizer to construct the least-volatile portfolio possible using constituents of the MSCI Emerging Markets Index under a set of constraints,” according to Morningstar. “The optimizer takes into account each stock’s volatility and how they interact with each other to affect the portfolio’s volatility. It uses this information to select and weight stocks from the parent index. However, the fund limits sector and country tilts relative to the MSCI Emerging Markets Index, exposure to individual names, and turnover, which reduces transaction costs. These constraints reduce the fund's style purity, but they also allow investors to use this as a core holding.”

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 this 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.

China, Taiwan and South Korea combine for about 52% of EEMV's geographic exposure. At the sector level, financials, technology and consumer staples combine for nearly 60%.

“From November 2011 through August 2017, the fund outpaced the MSCI Emerging Markets Index by 0.4 percentage points annualized, with 23% lower volatility,” said Morningstar. “This outperformance can be partially attributed to differences in sector exposures, specifically, underweightings in basic materials and energy and an overweighting in healthcare. Less exposure to countries such as Brazil and Russia also helped performance. The fund won’t always come out ahead: Investors should expect it to lag in strong market rallies.”

For more information on the low-vol strategy, visit our low-volatility category.

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