3) Risk-Adjusted Outperformance
Yup, if higher returns and lower risk sounds like alpha to you, you’re right. We found statistically significant risk-adjusted outperformance over the past three years of 4.9 percent annualized. That’s against our MSCI emerging markets benchmark, which is extremely similar to the index tracked by EEM.
4) Better Diversification
Many U.S. investors come to emerging markets in part for lower correlation to their U.S. equity allocation—often the largest part of their portfolio. Here again, EEMV’s correlation of 0.38 beats EEM’s 0.48, using SPY as a proxy for U.S. equity. (Returns with 1.00 have perfect correlation.) Lower correlation means better diversification mojo for investors with sizable U.S. equity allocations.
What To Expect Going Forward
EEMV’s performance has been sterling over the past three years, as the numbers above show. Will it continue? I believe only one of the four bullet points above can be firmly counted upon going forward, but that doesn’t doom the fund’s appeal. Let me explain.
The only attribute I expect to persist is lower volatility. EEMV should deliver a smoother ride than EEM for two reasons. First, the fund’s math works. Second, I expect the future to be like the recent past when it comes to volatility and correlation—relative to EEM.