Checking In: Low Volatility, Low Rewards?
As has been noted, volatility ETFs are all the rage these days. High volatility, low volatility. There's an ETF for that. Probably more than one. There are even a couple of funds to help minimize volatility in the emerging markets.
We'll check in with one today, the iShares MSCI Emerging Markets Minimum Volatility Index Fund (NYSE: EEMV). You guessed it: EEMV is designed to be the low vol equivalent of the wildly popular iShares MSCI Emerging Markets Index Fund (NYSE: EEM), the second-largest emerging markets ETF on the market today.
As the world's largest ETF issuer, iShares typically rolls out a fair amount of new ETFs in any given year, but EEMV was arguably one of the better new iShares ETFs in 2011. Being completely superficial, the EEMV debuted in mid-October and has amassed over $54 million in assets under management. The fund's expense ratio of 0.25% is also worth noting.
Home to 202 stocks, financials lead the sector weights at over 23%. Remember, this is a LOW volatility ETF, not a NO volatility fund. But staples, telecom, utilities and health care names do combine for about 40% of EEMV's weight.
To offer a legitimate low volatility angle in an emerging markets ETF, a few things need to be happen with the country allocations. First, there must be a sizable weight to South Korea and Taiwan. Second, Russian exposure needs to be kept to a minimum. Finally, frontier market exposure must be minimal if not non-existent.
EEMV obliges. Taiwan and South Korea combine for almost a quarter of the ETF's weight. Russia's weight is just 1.6% and countries with a the frontier markets label are about 2.5% of EEMV's lineup. China and Brazil combine for another 26% of EEMV's fray. With an allocation of 8.7%, South Africa's is the ETF's fifth-largest country weight.
There's a two-part bottom line to consider with an ETF like EEMV and its rival, the EGShares Low Volatility EM Dividend ETF (NYSE: HILO). Both funds do what they say and are as advertised. That's a good thing. However, the rub is that when the risk on trade is on, as it has been to start 2012, ETFs like EEMV aren't going to be performance leaders and we see that by measuring EEMV's year-to-date returns against EEM's.
The new low vol play was up 7.1% at the start of trading today, that's roughly half of what the more traditional EEM had returned. In other words, you'll pay for piece of mind with EEMV and that payment comes in the form of inferior returns in certain market environments.
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