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Low-Volatility and Dividend ETFs for International, Emerging Markets


Some ETF investors nervous about the looming U.S. fiscal cliff are looking at international markets for better growth opportunities and diversification.

There are many low-cost funds that provide straight, market-cap-weighted exposure to developed countries and developing markets.

However, one analyst recommends investors take a lower-risk approach to investing abroad with ETFs that employ low-volatility and dividend strategies.

For Europe and other developed markets, Morningstar ETF Investor newsletter editor Sam Lee says he likes iShares MSCI EAFE Minimum Volatility (EFAV). Launched in October 2011, the ETF has $196.6 million in assets. The fund holds 172 stocks and charges an expense ratio of 0.2%, according to manager BlackRock (BLK).

The ETF selects the least-volatile stocks in the MSCI EAFE Index, a popular benchmark for international developed markets. EAFE stands for Europe, Australasia and Far East.

Historically in back tests, the specialized benchmark has had about one third to one fifth less volatility in the market-weighted EAFE Index, Lee notes. Volatility is a measure of a security’s tendency to jump around in price. [Low-Volatility ETFs vs. Dividend ETFs]

“Low volatility is a really compelling strategy because it seems over the long run low volatility strategies will offer you above the market return, but with about less risk. So I think it’s really promising strategy to apply especially in the more volatile markets right now,” Lee said in a video interview.

For developing markets, the Morningstar ETF analyst says he favors WisdomTree Emerging Markets Equity Income (DEM). The popular fund has raked in $2.4 billion of inflows so far this year, according to Index Universe data. [Emerging Market Dividend ETFs: How to Choose the Right Fund]

DEM has an expense ratio of 0.63% and is paying a SEC 30-day yield of 4.2%, according to sponsor WisdomTree (WETF). The fund holds assets of $4.4 billion.

“There is higher turnover, but I think that the value tilt and the dividend tilt are very useful especially in the emerging markets because emerging markets are countries in which accounting standards are not as clear, as uniform, and their balance sheets are not as transparent,” Lee said. “And not only that, but management may not be as well-aligned with shareholders as they are in U.S. companies. So if you own dividend-paying stocks, then you’re buying stocks in companies where management’s interests and your interests are more well-aligned.”

WisdomTree Emerging Markets Equity Income

The opinions and forecasts expressed herein are solely those of John Spence, 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.