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Low-Volatility ETFs for Emerging Markets


Emerging market equities have been underperforming developed economies this year, but low-volatility ETFs have been holding up better in this notoriously risky asset class.

The iShares MSCI Emerging Markets ETF (EEM) is down 5.1% year-to-date, whereas the S&P 500 index has gained 10.6%. Meanwhile, the iShares MSCI Emerging Markets Minimum Volatility ETF (EEMV) has stayed relatively flat, dipping 0.3% year-to-date. Over the past year, EEMV has gained 10.6%, compared to the 1.8% rise in EEM.

“This ETF’s portfolio provides a desirable combination of lower volatility and, given its sector tilts versus the cap-weighted benchmark, more direct exposure to domestic growth, which is one of the more appealing reasons for investing in emerging markets,” writes Morningstar Patricia Oey in an overview for EEMV.

In a white paper, Emerging Global Advisors attributed the wider price swings in the MSCI Emerging Market Index, the underlying index of EEM, to large concentrations in volatile sectors like financials, energy and materials, and more volatile countries like Russia and Brazil, reports Ben Levisohn for Barron’s.

Low-volatility strategies have shown a history of outperforming traditional benchmark indices, both in the U.S. and overseas, generating better risk-adjusted returns relative to their corresponding cap-weighted indices over the long run.

“Over the 10 years ending Dec. 31, 2012, this ETF’s benchmark index outperformed its parent index by an average of 350 basis points per year while exhibiting much lower volatility (the MSCI Emerging Markets Minimum Volatility Index had and annual standard deviation of 19.3% versus 24.1% for the parent index over this period),” Oey added.

The emerging markets are expected to post an overall growth of 5.9% for 2013, compared to the 2% in developed economies. However, because of a more conservative tilt, low-volatility strategies could underperform during short-term bull market rallies. [Emerging Market ETFs Ready for A Turnaround?]

Along with EEMV, investors can take a look at the PowerShares S&P Emerging Markets Low Volatility Portfolio (EELV) . Compared to EEMV, EELV does not include sector or country constraints on weightings. The PowerShares fund has also been underweight energy and tech companies while overweighting defensive utilities and consumer staples. [Low-Volatility ETFs for Emerging Markets]

Additionally, the EGShares Low Volatility Emerging Markets Dividend ETF (HILO) tracks dividend paying stocks, which tend to be less volatile than the broad market. According to Emerging Global Advisors, dividends accounted for mover 25% of the performance found in emerging market equities in the past decade.

iShares MSCI Emerging Markets Minimum Volatility ETF

For more information on the emerging markets, visit our emerging markets category.

Max Chen contributed to this article.

Full disclosure: Tom Lydon’s clients own EEM.

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.