The low volatility factor is a favorite among investors and that theme extends beyond U.S. equities. Investors can use exchange traded funds to harness the low volatility factor while tapping ex-US developed markets stocks, a strategy that has worked well in 2017.
For example, the iShares Edge MSCI Min Vol EAFE ETF (CBOE:EFAV) is up 20 percent year-to-date. The $7.8 billion EFAV tracks the MSCI EAFE Minimum Volatility (USD) Index, the low volatility offshoot of the widely followed MSCI Index.
EFAV's underlying index “aims to reflect the performance characteristics of a minimum variance strategy applied to the large and mid cap equity universe across Developed Markets countries around the world excluding the US and Canada,” according to MSCI. “The index is calculated by optimizing the MSCI EAFE Index, its parent index, in USD for the lowest absolute risk (within a given set of constraints). Historically, the index has shown lower beta and volatility characteristics relative to the MSCI EAFE Index.”
Relative to traditional, cap-weighted ex-US developed markets strategies, EFAV's roster is small with just under 240 stocks. Still, the ETF has an equity beta of just 0.43 and a three-year standard deviation of about 9.78 percent, according to issuer data.
“The fund attempts to create the least-volatile portfolio possible with large- and mid-cap stocks listed in developed markets in Europe, Australia, and Asia under a set of constraints,” said Morningstar in a note out last week. “These include limiting sector and country tilts relative to the MSCI EAFE Index, which improves diversification. This strategy doesn't just target the least-volatile stocks. It also takes into account each stock's exposure to common risk factors and how they interact with each other to affect the portfolio's overall volatility.”
None of EFAV's 239 holdings account for more than 1.5 percent of the ETF's weight. EFAV's top 10 holdings combine for just 14 percent of the fund's weight.
Solid Track Record
EFAV debuted in the fourth quarter of 2011 so it doesn't have the 10-year track record many investors crave when it comes to ETFs and mutual funds, but age hasn't affected EFAV's performance.
“So far, the fund's approach has worked well. From November 2011 through August 2017, it exhibited 22% less volatility than its parent index,” according to Morningstar. “And it outpaced the benchmark by 1.6 percentage points annualized during that time. This was primarily thanks to more-favorable stock exposure within several sectors rather than differences in sector weightings.”
EFAV allocates about 43 percent of its combined geographic to Japan and the UK and another 21.6 percent to Switzerland and Hong Kong.
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