Under The Hood: Is Now The Time? (EELV, SPLV, VWO)
Looking at the year-to-date returns for some of the largest emerging markets ETFs, it's easy to see how some investors might perceive the current state of affairs as encouraging or compelling enough to throw money at some of these funds. After all, the Vanguard MSCI Emerging Markets ETF (NYSE: VWO), the largest of all emerging markets funds, is up 12.6% year-to-date.
And despite assorted macroeconomic headwinds, the iShares MSCI Brazil Index Fund (NYSE: EWZ) and the iShares FTSE China 25 Index Fund (NYSE: FXI) are still in the green through the first quarter. Well, the bulk of those gains were accrued in the first seven weeks of the year. Late February and essentially all of March have brought some glum activity for emerging markets ETFs.
That begs the question: Is now the time to turn to lower volatility options in the EM ETF universe? If the answer is "yes" then one interesting option is the newly minted PowerShares S&P Emerging Markets Low Volatility Portfolio (NYSE: EELV). EELV debuted in mid-January along with a developed markets equivalent, the PowerShares S&P International Developed Low Volatility Portfolio (NYSE: IDLV).
Performance-wise, EELV has been no slouch since its debut, gaining almost 8%, though its volume (less than 4,300 shares per day average) and assets under management ($5.4 million) aren't yet robust enough to crown the ETF an outright success.
EELV tracks an index that includes all publicly listed equity securities with float-adjusted market values of at least $100 million and annual dollar value traded of at least $50 million from the following countries: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, South Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand and Turkey.
The fund's current country composition includes a 24.2% allocation to Malaysia, a 17.3% weight to South Africa and a 10.35% weight to Taiwan.
As is the case with other low volatility ETFs, EELV does feature sizable allocations to the consumer staples and utilities sectors. Those two sectors combine for 30% of the ETF's weight, but financials are by far the largest sector weight at almost 27%. Industrials and telecom names receive weights of just below 10% each.
Beyond the obvious of knowing what one is getting into at the sector and country levels, the most important questions regarding an ETF such as the PowerShares S&P Emerging Markets Low Volatility Portfolio are "Does the ETF do its job?" and "Does it provide shelter from the storm while keeping me in the emerging market game?"
The statistics indicate the answer is "yes." Since the start of March, EELV is down 1.1%. That performance doesn't deserve a gold star, but it's a lot better than 3.6% loss for VWO or the 3.77% decline for the iShares MSCI Emerging Markets Index Fund (NYSE: EEM).
Of course the rub with low volatility ETFs is that investors sacrifice upside when the market is embracing risk. That explains why the PowerShares S&P 500 Low Volatility ETF (NYSE: SPLV), the king of low volatility ETFs, is getting killed by the S&P 500 this year, but when it comes to emerging markets, low volatility might be the best course action at the moment.
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