U.S. Markets closed

Getting Defensive in Emerging Markets

This article was originally published on ETFTrends.com.

Investors have heard plenty about the struggles of emerging markets stocks and the related exchange traded funds this year. The widely followed MSCI Emerging Markets Index entered Monday with a year-to-date loss of nearly 13%.

Emerging markets low volatility strategies have been significantly less bad. Entering Monday, the iShares MSCI Emerging Markets Minimum Volatility ETF (Cboe:EEMV) was down just 5.60% year-to-date.

EEMV is a low-vol variant on the widely observed MSCI Emerging Market Index, is a solid option for investors looking for a volatility-reducing strategy that provides exposure to resurgent developing world stocks.

“From the perspective of factor investing, in the current environment, we favor momentum and minimum volatility, are neutral on value and quality, and underweight size,” said BlackRock in a recent note. “As for minimum volatility, a slowing growing economy favors this more defensive factor. Valuations are reasonable, and its relative strength markedly improved in October amid an increasingly defensive tone in equity markets.”

Examining EEMV ETF

EEMV targets the MSCI Emerging Markets Minimum Volatility Index and holds 315 stocks. The ETF's three-year standard deviation of 11.31% is well the 14.88% found on the MSCI Emerging Markets Index. EEMV allocates over 40% of its weight to Chinese and Taiwanese stocks.

Investors considering EEMV should note that is fund, like other low volatility ETFs, focuses more more slow and stable companies, the low volatility strategy may underperform more growth-oriented stocks if the markets turn around.

ETF of the Week: Xtrackers Harvest CSI 500 China A-Shares Small Cap ETF (ASHS)

The low-volatility factor investments work on the idea that they help cushion against market turns, limiting drawdowns that investors experience while providing upside potential. Consequently, the low- or min-vol strategies may produce better risk-adjusted returns over the long haul, which has been backed by extensive academic research.

“We’re constructive on EM equities, but this year is a sober reminder of the risks of EM investing. We remain positive toward EM as valuations have cheapened this year, positioning remains light, and earnings growth remains strong,” said BlackRock. “Still, investors may want to consider a minimum volatility strategy, which historically has provided some buffer during sell-offs while at the same time capturing much of the upside.”

For more on smart beta ETFs, visit our Smart Beta Channel.