Low Volatility ETF Offers "One-Step" Exposure to Emerging Markets
02/15/2018 5:00 am EST
The iShares MSCI Emerging Markets Minimum Volatility ETF (EEMV) is an exchange-traded fund that seeks to track the investment results of the MSCI Emerging Markets Minimum Volatility Index, explains John Persinos, editor of Personal Finance.
EEMV is a simple and inexpensive way to play the rise of emerging markets. After a two-year slump, emerging markets rebounded in 2017. This momentum should continue next year.
Emerging market stocks have passed in and out of vogue over the past two decades, as investors have fluctuated from unbridled enthusiasm about their growth prospects to intense hand-wringing about their riskiness.
Now, they’re popular again and with good reason. Global growth this year has been “synchronized,” which means the pace has been roughly equal in all regions. This marks the first time that expansion has spread evenly around the world since 2010.
Tailwinds for emerging markets include population growth, higher education levels, greater technological savvy, and the expansion of a free-spending consumer class that skews toward a younger demographic.
EEMV holds 268 emerging-markets stocks of all sizes and weights them by market capitalization. These holdings encompass 24 markets. Financial services and technology represent the fund’s largest sector weightings, each accounting for about 20% of the portfolio.
EEMV’s top holdings are skewed toward Asia, a region that’s been on a tear. China represents the fund’s largest country weighting, at 25.31% of the portfolio.
China has resumed its role as global growth engine, assuaging anxieties that it would start to sputter. The annual gross domestic product (GDP) growth rate in the world’s second-largest economy is coming in at about 6%, supported by continued policy stimulus.
The next biggest country weightings are Taiwan (16.39%) and South Korea (10.66%). Both Asian stalwarts are on an upward trajectory. With export-dependent economies oriented toward electronics and high technology, these two countries are positioned for sustained long-term growth.
Indeed, all of the Asian “tigers” have regained their roar. Commodity and energy prices are rising and these export nations are breaking trade records.
The fourth largest country in the portfolio by weighing is India (7.67%). The “Jewel in the Crown” boasts an
exploding middle class that will propel growth far into the future. Already a major destination for information technology outsourcing, India’s indigenous tech sector is booming and its factories are humming.
EEMV’s portfolio gravitates toward the largest emerging-markets stocks. These companies boast global operations, with major footprints in developed and developing nations alike. EEMV’s portfolio of stocks generally trade at lower valuations than their developed nation counterparts.
Despite their run up this year, emerging market equities are value plays in a broader equity market that’s overbought. Developing markets have underperformed developed countries over the last three years and they still trade at a discount in terms of such valuation metrics as price-to-earnings, price-to-sales, and price-to-book value.
To be sure, there are risks on the horizon. Rising tensions throughout the Pacific Rim could worsen. Meanwhile, emerging economies with large and rising debt could stumble if their balance sheets become unsustainable.
But these short-term dangers are outweighed by the long-term plusses. The time to invest in emerging markets is now, before irrational exuberance about their prospects takes hold again and their stocks begin trading at a premium. EEMV is a safer, one-step way to gain exposure to this opportunity.