Market Overview

Trim Risk, Keep International Exposure With This ETF

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Trim Risk, Keep International Exposure With This ETF

International stocks have made a habit of trailing their U.S. counterparts. For the three years ending Sept. 5, the S&P 500 is higher by 43.4%, more than double the 19.8% returned by the MSCI EAFE Index.

What Happened

While ex-U.S. developed markets have long traded at discounts to the S&P 500 and other major domestic equity benchmarks, recently volatility at the hands of trade wars and other geopolitical headwinds has kept investors from embracing international equities.

One way of wading back into that pool is with the iShares Edge MSCI Min Vol EAFE ETF (CBOE: EFAV). The $11.62 billion EFAV follows the MSCI EAFE Minimum Volatility (USD) Index, the low volatility answer to the cap-weighted MSCI EAFE Index.

Year to date, EFAV and the parent index are moving in lockstep, but the iShares fund has been 280 basis points less volatile, indicating it's doing its job and while providing better risk-adjusted returns.

Why It's Important

“This fund’s big appeal is its ability to maintain exposure to stocks while taking less risk than the market,” said Morningstar in a recent note. “It will likely lag the MSCI EAFE Index during strong bull markets but hold up better when the market declines. This should outweigh the gains that it sacrifices during market rallies and lead to better risk-adjusted performance over the long haul.”

EFAV holds 282 stocks, significantly less than are found in the MSCI EAFE Index, but lack of depth has not hindered the fund's long-term performance since its October 2011 inception.

“This approach has worked well. Between February 2018 and December 2018, the MSCI EAFE Index declined by 17.9% while the fund lost about half that figure,” according to Morningstar. “And it was 24% less volatile than the benchmark from its launch in October 2011 through May 2019. Less risk pushed its risk-adjusted returns to the top of the foreign large-blend Morningstar Category over that stretch.”

What's Next

What could stand in the way of further upside for EFAV this year is more weakness in Eurozone economies (17% of the fund's weight) and more Brexit controversy (U.K. is 11.87% of EFAV's weight).

On the upside, EFAV allocates nearly 29% of its weight to Japan, a region where stocks are inexpensive and companies are hoarding record amounts of cash.

Morningstar has a Silver rating on EFAV.

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