Low Volatility EM ETFs Are Outperforming, Too
Maybe it is a case of not letting exchange-traded funds such as the PowerShares S&P 500 Low Volatility Portfolio (PowerShares Exchange-Traded Fund Trust II (NYSE: SPLV)) have all the fun, but emerging markets equivalents are joining their U.S.-focused low volatility counterparts in outperforming traditional benchmarks this year.
While investors are being led to believe this an incredible year for emerging markets equities, the widely followed MSCI Emerging Markets Index is up just 0.7 percent year-to-date. That pales in comparison to the returns offered by the iShares MSCI Emerging Markets Minimum Volatility ETF (iShares Inc. (NYSE: EEMV)) and the PowerShares S&P Emerging Markets Low Volatility Portfolio (PowerShares Exchange-Traded Fund Trust II (NYSE: EELV)).
A Closer Look AT EELV And EEMV
EELV and EEMV are up 5.4 percent and 1.8 percent, respectively, year-to-date. Importantly, the time could be right to consider these funds because “sell in May” can apply to emerging equities, too.
“The May through October seasonal softness, often referred to as the 'Sell in May' period, is not just a U.S., large-cap phenomenon according the Sam Stovall, Equity Strategist for S&P Global Market Intelligence. Since 1998, the S&P Emerging BMI Index advanced an average of 11.5 percent, from November and April but declined 0.2 percent in May and October. However, the S&P BMI Low Volatility Emerging Markets index was up 1.0 percent on average during this May to October period,” said S&P Capital IQ in a note out Monday.
Country And Sector Differences
Wide return discrepancies between EELV and EEMV underscore some important country- and sector-level differences between the two ETFs. For example, EEMV's country lineup is almost predictable, although that is not a bad thing, with a combined weight of almost 29 percent to Taiwan and South Korea, historically two of the least volatile emerging markets.
EELV allocates 26.8 percent of its combined weight to those two low beta emerging markets, but the PowerShares ETF's weight to Malaysia, another historically low beta developing market, is nearly 600 basis points more than that of its iShares rival.
China exposure between the two ETFs varies in a big way. EEMV has an 18.2 percent weight to Chinese stocks, making that country the ETF's biggest geographic weight. On the other hand, EELV devotes just 3.5 percent to China, making it that fund's smallest country exposure.
“As their names imply, these ETFs have generated below-average volatility relative to the iShares MSCI Emerging Markets Index ETF (EEM). As of the end of April 2016, EEMV’s and EELV’s standard deviation of 13.0 and 13.8 were lower than EEM’s 16.4. Though EELV has been the better performer to start to 2016, it lost more money in 2015 (19 percent vs. 12 percent for EEMV),” added S&P Capital IQ.
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