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A Low Volatility ETF in Emerging Markets
09/06/2016 10:00 am EST
Warren Buffett’s famous quote, “Be greedy when others are fearful,” applies perfectly to emerging markets right now. Investors have been yanking capital from these regions for some time, asserts Tim Begany in Investing Daily's Personal Finance.
All this sets the stage for greed in the face of fear, an approach that certainly served Buffett well. We recommend capitalizing on these sentiments with the iShares Edge MSCI Minimum Volatility Emerging Markets (EEMV), an ETF we added to the portfolio a year ago.
As its name suggests, EEMV loads up on the least volatile emerging markets equities, and this strategy keeps long-term returns well ahead of most peers.
While the typical emerging markets exchange-traded fund lost an annualized 4% the past three years, EEMV dropped only 0.8%.
The fund launched in October 2011, so it lacks a five-year record, but the benchmark it tracks beat the MSCI Emerging Markets Index by about 4% annually over the trailing 10- and 15-year periods ending in March.
And it did so with substantially less risk. EEMV yields the same 2.4% as the MSCI Emerging Markets Index.
Emerging markets have had several missteps, but mega-factors are on their side. Analysts predict outperformance in the coming decade as the middle classes in developing countries continue to expand and consume more, driving superior economic growth. Forecasts are for an annualized 8% return after inflation.
EEMV’s bogey, the MSCI Emerging Markets Minimum Volatility Index, contains the 250 least volatile stocks in MSCI’s broader emerging markets index.
This reduces fund price swings 23% relative to the peer group’s average, as the resulting portfolio is heavy on safer large-cap stocks (currently 88% of assets) and light on the riskiest developing countries.
Sector allocations also reflect a minimum-volatility strategy, with the fund gravitating to safer companies that provide essential products or services and have steady cash flow.
Though EEMV is relatively tame, expect substantially more price fluctuation than you get with US equities. For the past three years, the fund was 18% more volatile than the S&P 500.
EEMV’s expense ratio is 0.25%, including a 0.42% management fee waiver that can be reduced or discontinued at any time without notice.
Still, even if iShares completely eliminated the waiver, fund expenses would only rise to 0.67% of assets, which is slightly lower than the 0.69% category average.
Either way, shareholders get a good price on an emerging markets investment that outperforms most peers with a much smoother ride.
By Tim Begany, Editor of Investing Daily's Personal Finance
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