Amid Hoopla, Low Vol Emerging Markets ETFs Thriving
To say October has been a busy month for two of the marquee emerging markets ETFs on the market is an understatement. Vanguard, the third-largest U.S. ETF sponsor, got the ball rolling on October 2 when it announced it would drop MSCI Indexes on 22 of its ETFs, including the wildly popular Vanguard MSCI Emerging Markets ETF (NYSE: VWO).
BlackRock's (NYSE: BLK) iShares, the world's largest ETF sponsor, made waves of its own earlier this week when announced the creation of its core series of ETFs. iShares' core ETFs, which will likely further intensify the firm's rivalry with Vanguard, are aimed at cost-conscious buy-and-hold investors.
Among those funds will be the iShares Core MSCI Emerging Markets ETF (NYSE: IEMG), which will begin trading on October 22. The popular iShares MSCI Emerging Markets Index Fund (NYSE: EEM) will remain as is. Still, VWO and EEM, the two largest emerging markets with about $95 billion in assets under management combined, have spent plenty of time in the spotlight this month.
That is not necessarily a bad thing, but the attention being lavished upon EEM and VWO obfuscates the success of two emerging markets funds that employ the popular low volatility methodology.
Oddly enough, one of those low volatility ETFs comes from iShares, the iShares MSCI Emerging Markets Minimum Volatility Index Fund (NYSE: EEMV). The other is the slightly newer PowerShares S&P Emerging Markets Low Volatility Portfolio (NYSE: EELV).
There are several facts that make the relative anonymity with which EEMV and EELV toil strange, if not shameful. For starters, the low volatility strategy as it pertains to ETFs has proven successful beyond a shadow of doubt. The PowerShares S&P 500 Low Volatility Portfolio (NYSE: SPLV) is 18 months and has over $2.5 billion in AUM. The iShares MSCI USA Minimum Volatility Index Fund (NYSE: USMV) is just a year old and has almost $440 million in AUM.
Said differently, popularity of the "low vol" theme alone should have warranted more mainstream examination of EELV and EEMV. That has not been the case.
Second, there is the matter of fees. After all, it is fees that have prompted many of the ETF industry's recent winds of change. At least that is what some would say about iShares. VWO charges just 0.2 percent, an expense ratio that long ago allowed the ETF to pass EEM as the biggest emerging markets fund. EEM charges 0.67 percent.
With expense ratios of 0.25 percent and 0.29 percent, respectively, EEMV and EELV are not much pricier than VWO and the two low volatility options are clearly cheaper than EEM.
Next is the matter of performance. EEM and VWO are both up more than 11.4 percent year-to-date. That slightly outpaces the returns delivered by EELV, but in the past six months, EELV is up while EEM and VWO are in the red. Noteworthy is the fact that EELV year-to-date to gain is line with EEM's while providing some respite from the volatility of developing nations and a cheaper valuation.
The case of EEMV is even more eye-opening. That ETF is up almost 16.6 percent year-to-date. Since its debut, EEMV has outperformed EEM and VWO by more than 800 and 900 basis points, respectively. If there is a tradeoff with EEMV it is valuation. The ETF has a P/E ratio of 20.5 and a price-to-book ratio of almost four.
There are differences between EELV and EEMV. Taiwan and South Korea combine for 26 percent of EEMV's weight, but represent less than 17 percent of EELV's combined weight. The PowerShares fund is dominated by Malaysia and South Africa, which combine for over 40 percent of that ETF's weight. Those two countries are less than 17 percent of EEMV.
Even with those differences, EELV and EEMV do not need to be owned simultaneously. Investors should, however, consider owning one of these funds and perhaps changing out of EEM or VWO to do so.
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