An ETF For The Cautious Emerging Markets Investor
Thursday may not be the day to revisit this particular topic as plenty of marquee emerging markets ETFs are trading lower on the day.
However, the past month has brought something of a modest resurgence for select emerging markets ETFs with many of the group's most popular names either eking out small gains or managing to be noticeably less bad than they have been for most of this year.
Federal Reserve tapering fears have ebbed a bit and some emerging markets central banks, though not those in Brazil and India, remain committed to accommodating monetary policy giving investors some reason to at least consider developing market ETFs.
Although economic growth is slowing in China this year, growth is seen rising in other BRIC nations and South Africa and South Korea in 2014 providing a possible catalyst for patient investors.
One ETF that capitalizes on the ultra-popular low volatility theme stands out as a way for investors to get involved with emerging markets right now without losing sleep. That fund is the PowerShares S&P Emerging Markets Low Volatility Portfolio (NYSE: EELV).
Around here, we've been fans of EELV for a while, going back to a time when the ETF still lived life below the overrated $100 million in assets under management mark. In December 2012, the fund had $86.5 million in assets. It now has $162.5 million, almost doubling its total in what has been a dismal year for emerging markets ETFs.
EELV and the rival iShares MSCI Emerging Markets Minimum Volatility ETF (NYSE: EEMV) have both significantly increased their AUM totals this year indicating that while investors have withdrawn billions from other emerging markets ETFs, some of those dollars have flowed to low volatility products. EEMV's AUM total is about two-and-half times larger today than it was around Christmas 2012.
The secret to EELV's potential allure to conservative investors really is not a secret at all. Just as sector weights can make significant differences with broad market ETFs and just as varying weights to the same stocks can make for varying returns with sector funds, country allocations can make all the difference with emerging markets ETFs.
EELV is down just three percent in the past three months while some larger, diversified rivals are sitting on the double-digit losses and that performance gap is explained by what countries EELV includes and excludes.
The fund's thin BRIC exposure has previously been highlighted as one of its primary advantages. Current combined exposure to China and Brazil is about 12 percent with no weights to India or Russia.
As important as what EELV excludes at the country level is what it includes. That being a combined 40.5 percent weight to Taiwan and Malaysia, two Asian markets with low-beta reputations. Not only are Malaysia and Taiwan perceived as less volatile than other developing markets, the corresponding single-country ETFs have recently been among the best performers tracking Asian nations.
The wild card in EELV's lineup is South Africa at a weight of 12.8 percent. South Africa's status as a major precious metals producer levers stocks there gold, platinum and palladium prices. On the other hand, if a bottom is really in for gold, EELV could benefit. As it is, the iShares MSCI South Africa ETF (NYSE: EZA) has traded slightly higher over the past month.
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