Low-Volatility EM ETF Plays As Uncertainty Lingers

ETF Trends

The Ukraine and Russia standoff on the Crimea peninsula has sent emerging market stocks tumbling. However, investors who still want exposure to developing economies can take a look at low-volatility exchange traded fund options with limited access to Russian equities.

“Low-volatility strategies in emerging markets have historically resulted in a greater reduction in portfolio volatility relative to a cap-weighted index than what has been observed in U.S. equities,” according to Morningstar analyst Patricia Oey. “This is especially important in emerging markets, as volatility drag can have an impact on long-term performance.”

For instance, the iShares MSCI Emerging Markets Minimum Volatility ETF (EEMV) is down 1% and the PowerShares S&P Emerging Markets Low Volatility Portfolio (EELV) is 0.5% lower since Russia entered Crimea, Ukraine.

Meanwhile, the traditional cap-weighted index-based ETF, iShares MSCI Emerging Markets ETF (EEM) , has declined 2.4% so far this month.

Over the past year, EEMV has declined 8.5%, EELV dipped 9.9% and EEM fell 9.1%.

Both the iShares and PowerShares low-volatility emerging market ETFs try to limit exposure to stocks with large price fluctuations or show lower volatility.

Additionally, as the standoff continues and uncertainty remains, Russian equities could continue to drag on the emerging markets group. EEM, which tries to replicate the MSCI Emerging Markets Index, includes a 5.1% weight toward Russia. On the other hand, Russia exposure is limited in EEMV and only makes up 1.7% of EELV.

However, when investing in the low-volatility emerging market ETFs, investors will have to take into account  currency risks – the funds do not hedge against a depreciating foreign currencies, so falling emerging market currencies or a strengthening U.S. dollar can have a negative effect on returns.

“Emerging-markets equities and currencies can see steep declines when global market volatility spikes,” Oey warned.

For more information on low-vol funds, visit our low -volatility category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

View Comments (0)