Live Large With Developed Markets Without The Volatility

The low volatility factor and the exchange-traded funds dedicated are spending plenty of time in the limelight this year. Much of attention heaped upon these ETFs falls into the category of adulation, but there are concerns that among U.S.-focused low volatility products, the trade is crowded and that frothy valuations could prompt a dangerous rush for the exits.

Nearly half of the world's combined equity market capitalization is found outside the United States, but U.S. investors often associate international investments, even developed markets fare, as being more volatile than domestic equivalents. Combine the home country bias with perceptions about volatility and there is a logical explanation for why most U.S. investors heavily tilt their portfolios to U.S. investments.

Related Link: Enthusiasm For Energy ETFs

And simply because US-focused low volatility ETFs are on the receiving end of some criticism, that does not mean the strategy lacks merit for ex-U.S. developed markets. The PowerShares S&P International Developed Low Volatility Portfolio (PowerShares Exchange-Traded Fund Trust II IDLV) is an option to consider on that front.

No Idleness With IDLV

IDLV, which is now more than 4.5 years old and home to more than $350.7 million in assets under management, follows the S&P BMI International Developed Low Volatility Index. That index “consists of the 200 least volatile stocks of the S&P Developed ex. US and South Korea LargeMid Cap BMI Index over the past 12 months,” according to PowerShares, the fourth-largest U.S. ETF issuer.

While IDLV can be seen as a complement to or replacement for traditional EAFE exposure, the ETF differs significantly from standard EAFE indexes. For example, Canada is IDLV's largest country weight at 17.2 percent. Likewise, the ETF is not heavily allocated to Japanese stocks as are most EAFE index funds. IDLV is also overweight Australia and underweight Switzerland compared to standard EAFE fare.

With Canada, the U.K. and Australia — three of the top dividend growth markets outside the United States — combining for over 46 percent of IDLV's weight, the ETF packs a decent yield punch. IDLV's trailing 12-month distribution yield is 3.5 percent, which is better than the S&P 500, U.S. Treasurys and the yields on most of the sovereign bonds issued by IDLV's constituent countries.

IDLV is not currency hedged, indicating the ETF could be vulnerable to some downside if the dollar rises. Then again, the MSCI EAFE Index is not currency hedged either, and that index is up just 0.4 percent this year while IDLV is up 10.4 percent.

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