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Low Volatility EM ETFs Are Doing Their Jobs

April 4, 2018 12:52 pm
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Low Volatility EM ETFs Are Doing Their Jobs

Admittedly, the time frame is small and the full benefits of owning low volatility stocks and exchange-traded funds are best measured over the long term. Over the past month, however, low volatility emerging markets ETFs are topping their more traditional counterparts as stocks in developing economies have been caught up in the pullback seen here in the United States.

Emerging markets investors are skirting once hot cyclical sectors, such as technology, in favor of lower beta fare, including consumer staples. That's a trend that often benefits low volatility ETFs.

“Companies whose fortunes are closely tied to economic growth, such as those making car parts, have fallen out of favor in the past month,” reports Bloomberg. “Firms whose products are in demand regardless of economic cycles (no matter what, people will shave) are rallying in their stead.”

Data Confirmation

From March 1 through April 3, the MSCI Emerging Markets Index lost a tenth of a percent. That's better than the 2.2 percent lost by the S&P 500 over the same period, but some emerging markets ETFs are doing better than both of those widely followed indexes.

The iShares Edge MSCI Min Vol Emerging Markets ETF (CBOE:EEMV) and the PowerShares S&P Emerging Markets Low Volatility Portfolio (NYSE:EELV) are up an average of 2 percent over that period.

And yes, EELV and EEMV are doing their jobs when it comes being lower volatility bets. Again, one month isn't the appropriate measuring stick for volatility reduction strategies, but from March 1 through April 3, the average volatility on EELV and EEMV was about 16 percent compared to almost 24 percent for the MSCI Emerging Markets and nearly 21 percent on the S&P 500.

Some Surprises

With investors avoiding emerging markets technology stocks, it can be considered surprising that EEMV is trading higher since early March. That ETF allocates over 23 percent of its weight to tech, its second-largest sector weight. Lower beta consumer staples and telecommunications names combine for over 20 percent of EEMV's roster.

For its part, the PowerShares S&P Emerging Markets Low Volatility Portfolio has an almost 13 percent consumer staples weight but devotes just 7.58 percent to tech stocks.

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