Low Volatility Approaches In Emerging Markets

Emerging markets ETFs were under pressure during the first nine months of 2015 on concerns about slower economic growth and the impact of pending actions by the Federal Reserve. But in October, emerging markets have been much stronger. For those who want to stay invested in this style, but reduce their potential risk, low volatility ETFs might be appealing.

Through a rules-based approach, the index the ETF seeks to track chooses the stocks that have recently exhibited the lowest volatility. But of course there are differences between these products that are worth understanding when determining if one or another makes more sense for you and/or your client.

Not all emerging market countries have the same risk profiles.  

iShares MSCI Emerging Markets ETF (EEM) is the most actively traded emerging market ETF, with an average of 63 million shares traded on a daily basis; EEM trades with a $0.01 bid/ask spread. However, the ETF was down 8.9% year to date through October 27. The ETF has 844 securities with the largest country exposure in China (24% of assets), South Korea (16%) and Taiwan (12%), while sector exposure is greatest in financials (29%), information technology (18%) and consumer discretionary (9%).

In contrast, iShares MSCI Emerging Markets Minimum Volatility (EEMV) was down only 4.8% this year. The ETF holds 258 stocks in the broader MSCI emerging markets index that have below- average volatility. However, there are both sector and country bands that stay within 5% of the parent index at the semi-annual rebalance. The goal is to get a low volatility portfolio without introducing a potential concentration either by sector or country.

The resulting ETF has less exposure to China (19%) and South Korea (12%), but more exposure to Taiwan (17%) and Malaysia (8% vs. 3%). From a sector perspective, while the financials weighting at 29% is the same as EEM, the technology (12%) and consumer discretionary (5%) weightings were lower. Meanwhile, consumer staples (13% vs. 8%) and telecom services (12% vs. 7%) stakes were higher.

PowerShares also has a lower volatility emerging market product, though it takes a different approach and rebalances on a quarterly basis not a semi-annual basis. PowerShares S&P Emerging Markets Low Volatility (EELV) holds the 200 least risky stocks in the broader S&P BMI Emerging Markets index, but does not incorporate any sector or country bands.

Country Exposure in Emerging Market ETFs
As such, exposure was relatively limited in China (4% vs. S&P BMI Emerging Markets Index's 31%) and India (3% vs. 13%) and much higher in Taiwan (23% vs. 14%). Looking to sectors, financials (37% vs. 29%) and consumer staples (14% vs. 8%) were overweighted, while technology (5% vs. 17%) was underweighted.

It is still too early to have a good read on when emerging markets will recover from the 2015 doldrums. However, we think a low volatility approach offers investors with a way to participate in the stronger growth prospects of emerging markets, while trying to reduce their risk profiles.

To keep up with ETF trends, follow me on twitter or check out

Subscribe to Insights