Recently, my colleague Dennis Hudachek wrote about new ways to
access emerging markets beyond plain vanilla funds, such as using
dividend-weighted emerging markets ETFs.
I thought I'd build on his discussion, taking it into the realm
of low-vol funds. Mostly because it seems as if any new bit of
information from Europe or the Federal Reserve sets the markets
into an immediate rally or tail-spin. And when markets turn choppy,
they're often the choppiest in emerging markets.
Let's look at iShares MSCI Emerging Markets Minimum Volatility
Index Fund (NYSEArca:EEMV) and the PowerShares S&P Emerging
Markets Low Volatility Portfolio (NYSEArca:EELV)-two funds that
would appear to be quite similar, but are in fact rather
EEMV vs. EELV
Although both ETFs provide low-volatility plays on emerging market
equities-they accomplish this differently.
iShares uses the MSCI Emerging Markets Index as the parent index to
construct EEMV. The low-volatility basket is created using a
co-variance matrix to weight securities in such a way as to achieve
the lowest absolute volatility for the portfolio as a whole.
By diversifying risk and minimizing co-variance, price movements
are able to offset each other-creating a smoother return stream.
In addition, the MSCI Emerging Markets Minimum Volatility Index
also utilizes a capping system to maintain the integrity of the
index. For example, the sector and country weights of the index
can't deviate more than plus or minus 5 percent from the respective
weights of the parent.
Meanwhile, PowerShares' EELV uses a benchmark of the 200
least-volatile equities in the S&P Emerging BMI Plus
LargeMidCap Index. The constituents are then ranked by realized
volatility, with the least volatile securities receiving the most
No caps are introduced, and there's no consideration for the
correlation of securities with one another.
The graph below compares EELV's and EEMV's underlying
low-volatility indexes to the MSCI Emerging Markets Index.
That broad index serves as the benchmark for the two most popular
emerging markets funds:the $48.6 billion Vanguard MSCI Emerging
Markets ETF (NYSEArca:VWO) and the $33 billion iShares MSCI
Emerging Markets Index Fund (NYSEArca:EEM).
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