A Safer Way To Consider Emerging Markets

The low volatility factor is again proving to be a hit among exchange traded funds investors this year, but investors deploying that factor often lean toward domestic equities.

As the iShares Edge MSCI Min Vol Emerging Markets ETF EEMV proves, investors can reduce equity volatility in developing economies, too. The $5.46 billion EEMV follows the MSCI Emerging Markets Minimum Volatility Index and holds 337 stocks.

EEMV makes good on its reduced volatility promise. The fund's three-year standard deviation is just over 10%, or more than 400 basis points below that of the MSCI Emerging Markets Index.

Why It's Important

Over the past three years, EEMV has been 560 basis points less volatile than the MSCI Emerging Markets Index while lagging that benchmark by 260 basis points.

“Investors concerned about volatility may want to consider minimum volatility funds, which potentially can smooth out the ups and downs of EM investing,” said BlackRock in a recent note. “Consider the example of the recent decline: The MSCI Emerging Market Minimum Volatility Index is down around 10% since January 2018, well outperforming the MSCI EM Index’s 19% drop.”

At a time of still lingering trade uncertainty with China, EEMV could be attractive because its weight to the world's second-largest economy is more than 500 basis points below that of the parent index. EEMV is also overweight South Korea, typically one of the least volatile emerging economies, compared to the MSCI Emerging Markets Index.

“In just five years China’s weight in the MSCI Emerging Markets Index has risen from ~20% to 33% currently and is expected to exceed ~40% at full inclusion of China A shares,” according to BlackRock.

What's Next

EEMV has been a modest hit with investors this year, attracting over $363 million in new assets. That could be a sign that if emerging markets equities legitimately rebound, investors wanting some added protection over cap-weighted products may revisit EEMV.

At the sector level, the bulk of the fund's defensive positioning is derived from a combined 40.50% weight to the financial services and consumer staples sectors.

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