The low volatility factor and the related exchange traded funds do not miss out on 100% of the market's declines when equities falter, but the objective with these funds is to perform less poorly than their traditional rivals, explaining why many investors are embracing “low vol” this year.
While low volatility and the corresponding ETFs have been all the rage in the U.S. in 2019, investors looking for international exposure can put the factor to work for them with funds such as the iShares Edge MSCI Min Vol EAFE ETF (CBOE: EFAV).
EFAV is designed to be the low volatility answer to the MSCI EAFE Index. Over the past 90 days, the minimum volatility fund is higher by 3.3% while the widely followed MSCI EAFE Index is lower by 0.10%.
Again, the reduced volatility factor is designed to minimize downside risk, not capture all of the upside in a particular market. However, EFAV only lags the MSCI EAFE Index by 70 basis points over the past three years while being 240 basis points less volatile. That is pretty good trade-off.
Why It's Important
The $11.2 billion EFAV turns eight years old in October and holds 282 stocks. The fund's three-year standard deviation of 8.67% is actually lower than that of the 12.10% found on the S&P 500.
“The other advantage that fund has is it really maintains diversification very well,” said Morningstar in a recent note. “So, they limit the percent of assets that can be allocated to a single stock and they also control their sector weighting. So, they're not going to be heavily biased like utilities, the consumer staples, you know, these traditionally stable sectors.”
EFAV allocates over 27% of its weight to the defensive consumer staples and healthcare sectors, but it has some cyclical exposure with a combined 24% weight to industrials and communication services names. A combined 42.7% weight to Japanese and Switzerland is not surprising for an international low volatility strategy.
“So, if you're looking at the individual holdings in that fund, you may see some, like, very volatile mining companies that pop up every now and then,” notes Morningsar. “Again, that's more of a play on the correlations. The objective here is reducing the volatility of the overall portfolio.”
With volatility ticking higher and fears of recessions mounting around the world, particularly in Europe, a region that accounts for a significant percentage of the MSCI EAFE Index, investors that want to stay long stocks are likely to consider the low volatility factor.
Plus, EFAV is cheap at just 0.20% per year, or $20 on a $10,000 investment.
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