One of Our ETF Picks for Emerging-Markets Exposure
A low-volatility strategy can be a good option for emerging markets.
IShares MSCI Emerging Markets Minimum Volatility (EEMV) tracks an index that is designed to provide a less-volatile exposure to emerging-markets equities relative to a market-cap-weighted index. Low-volatility strategies seek to exploit the observed phenomenon that portfolios with smaller price fluctuations tend to outperform portfolios with larger price fluctuations over the long term.
This strategy has had a good track record--as measured by the back-tested performance of this fund's benchmark index (the index's live performance commenced in November 2009). Over the trailing 15- and 10-year periods through April 2015, this fund's underlying index generated 408 and 335 basis points, respectively, of annualized outperformance versus the cap-weighted MSCI Emerging Markets Index, with significantly lower volatility. The minimum-volatility index’s standard deviation of returns during the past decade was 19%, while the corresponding figure for the cap-weighted index was 24%. The minimum-volatility index has also seen less dramatic drawdowns. Following the 2008 financial crisis, while the MSCI Emerging Markets Index had a maximum drawdown of negative 59%, this fund's index fell by 49% over the same time period. Likewise, in 2011, when this fund's index fell 6%, the cap-weighted index fell 18%. These relatively muted drawdowns explain much of the strategy's outperformance versus its cap-weighted parent index during the past five years. Investors should note, however, that while this fund will generally suffer less during bear markets, it will also tend to lag during bull markets.
Patricia Oey does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.