How To Keep Developed Markets Exposure, Avoid Volatility

Low volatility exchange-traded funds are garnering plenty of attention this year, but investors should note the advantages of the low volatility factor are not confined to U.S. borders. That reminder is particularly important post-Brexit, as some investors are looking to maintain ex-U.S. developed markets exposure while mitigating risk.

The iShares Edge MSCI Min Vol EAFE ETF EFAV, the EAFE answer to the popular iShares Edge MSCI Min Vol USA ETF (iShares Trust USMV), is an ideal way for investors to main exposure to developed world equities while tempering portfolio risk and volatility.

Looking Beyond The United States

Nearly half of the world's combined equity market capitalization is found outside the United States, but U.S. investors often associate international investments, even developed markets fare, as being more volatile than domestic equivalents. Combine the home country bias with perceptions about volatility, and there is a logical explanation for why most U.S. investors heavily tilt their portfolios to U.S. investments.

Related Link: Low Volatility Works With Ex-U.S. Developed Markets, Too

Before Brexit

EFAV addresses those concerns as well. EFAV has a three-year standard deviation of 9.6 percent, compared to 13.3 percent on the widely followed MSCI EAFE Index. The advantages of EFAV and other low volatility were on display immediately following the Brexit outcome.

“Brexit certainly put minimum volatility strategies to the test. But they did what they were designed to do — reduced risk, in accordance to data from Bloomberg. However, minimum volatility funds are intended as long-term investments, so the more important question is this: What was their downside versus broad indexes over longer periods? Here too, minimum volatility strategies lost less than the relative broad market,” said BlackRock in a recent note.

Over the past three years, EFAV has outpaced the EAFE MSCI Index by an almost seven to one margin, while being 410 basis points less volatile than the traditional EAFE benchmark.

While U.S. low volatility ETFs are also getting plenty of attention for their 2016 asset-gathering acumen, EFAV deserves some of that adulation as well. EFAV has hauled in more than $3 billion in new assets this year, or nearly five times more than the iShares MSCI EAFE Index Fund (ETF) EFA.

“Historically, minimum volatility strategies have declined less than the broad indexes during market downtowns, but they also have risen less during rallies. In other words, these funds have captured (considerably) less downside and participated in most of the upside. Given that, some are tempted to just hold minimum volatility funds during times of greater market volatility,” according to Blackrock.