As the markets continue to digest the ongoing crisis in Europe,
unemployment figures, and whether or not central bank action will
come to fruition-high beta equities aren't necessarily the best bet
for some. That's where minimum volatility ETFs come into play.
Minimum volatility ETFs hold lower beta stocks relative to their
targeted benchmark. The idea is that investors get exposure to a
portfolio with minimized risks-as well as returns. The highs aren't
so high, but the lows aren't too low either.
Earlier this year, my colleague Paul Baiocchi professed his love
for the PowerShares S'P 500 Low Volatility Portfolio
(NYSEArca:SPLV). However, there are 6 other funds that aim to
provide the same strategy to investors.
The iShares MSCI All Country World Minimum Volatility Fund
(NYSEArca:ACWV) is currently the only fund that targets the global
equity space by selecting its holdings from the MSCI All Country
World Index. Like most of the minimum volatility funds, it's prone
to sector biases-consumer staples and health care stocks accounting
for nearly a third of the fund. Still, at 35 bps, ACWV is
competitive in pricing relative to other total market equity ETFs.
Year-to-date, the fund has slightly underperformed the MSCI ACWI
Index. However, it showed its true strength during the pullback
that started in late April.
%20and%20the%20iShares%20MSCI%20Emerging%20Markets%20Minimum%20Volatility%20Fund%20(NYSEArca:EEMV).%20Differences%20in%20costs%20are%20minimal.%20EELV%E2%80%99s%20expense%20ratio%20of%2029%20bps%20is%204%20bps%20more%20expensive%20than%20EEMV.%20However,%20EEMV%20is%20much%20more%20liquid%20than%20EELV,%20with%20over%2040,000%20shares%20changing%20hands%20per%20day.%20Both%20funds%20are%20heavily%20exposed%20to%20financials%20and%20consumer%20non-cyclicals,%20and%20both%20contain%20exposure%20to%20South%20Korea%E2%80%94a%20country%20some%20consider%20to%20be%20a%20developed%20economy.%20EELV%20does%20a%20better%20job%20of%20avoiding%20South%20Korea,%20with%20only%203%20percent%20invested%20versus%2010%20percent%20in%20EEMV.%3C/p%3E%0A%3Cp%3E%C2%A0%3C/p%3E%0A%3Chr%20class='system-pagebreak'%20/%3E%0A%3Cp%3E%C2%A0%3C/p%3E%0A%3Cp%3EThe%20key%20difference%20is%20that%20EEMV%20tilts%20heavily%20toward%20large-caps,%20with%20nearly%2040%20percent%20invested%20in%20companies%20worth%20more%20than%20$12%20billion%20in%20market%20cap,%20while%20only%20about%2020%20percent%20of%20EELV%20is%20invested%20in%20the%20space.%20Still,%20both%20funds%20have%20performed%20similarly%20throughout%20the%20course%20of%202012.%3C/p%3E%0A%3Cp%20style='text-align:center;'%3E%3Cimg%20src=)
The iShares MSCI EAFE Minimum Volatility Fund (NYSEArca:EFAV)
and the PowerShares S'P International Developed Low Volatility Fund
(NYSEArca:IDLV) duke it out in the developed ex-U.S. space.
PowerShares' IDLV comes out as the slightly more expensive fund,
with a price tag of 25 bps, while EFAV follows behind at 20 bps.
Both funds trade a few thousand shares per day, making them harder
to trade for smaller investors. Size tilts and country differences
are huge. Nearly 60 percent of EFAV is exposed to large-caps, while
about 30 percent of IDLV is invested in the large-cap space. Japan
(43 percent) and Canada (16 percent) are the heavyweights in IDLV,
while the United Kingdom makes up 28 percent of EFAV with Japan (27
percent) at a close second.
IDLV came out in mid-January, but has outperformed EFAV in
uptrends-likely due to EFAV's heavy exposure to large-caps.
If you're willing to reach out a little further than just U.S.
large-caps, then the iShares MSCI USA Minimum Volatility Fund
(NYSEArca:USMV) is the best option for you. The fund selects its
holdings from the MSCI USA Index-and does so for 15 bps, 10 bps
less than SPLV-for much broader exposure. Health care and consumer
companies make up the bulk of the fund, while it underweights
technology and energy stocks when compared with the MSCI United
States Index.
Going for a minimum volatility ETF is a great option for those
who don't want to stomach the highs and lows in the current
environment. The key is understanding the biases and tilts within
these portfolios.
Contact Ugo Egbunike at uegbunike@indexuniverse.com.
At the time this article was written, the author held
positions in SPLV.
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