Lower Risk & Higher Returns With This ETF

October 29, 2014

Given that EEMV takes less risk, I don’t expect it to deliver higher returns than EEM going forward, nor do I expect risk-adjusted outperformance.

I’m not sure what to make of EEMV’s lower correlation over the past three years. My guess is that hot money flows in and out of EEM much as it does with SPY in a risk-on, risk-off manner, while big-time traders avoid EEMV.

This theory holds up only to the extent that ETF flows transmit their impact to the underlying securities, which ultimately set the fund’s value.

The Case

So what’s the appeal for EEMV if the expectation is lower risk and lower return versus EEM. Why not simply allocate less to EEM and more to cash to achieve the same effect? (We calculate EEMV’s beta to be 0.79, which argues for a roughly 80/20 EEM/cash mix.)

That’s the classic finance approach, but it raises questions of its own:

  • Do you have the discipline to bear the volatility of EEM, even in a smaller allocation?
  • Are you willing to accept cash’s return, which may be negative in real terms?
  • Are you timing the mix of exposure to the cash and EEM based on your assessment of risk and opportunity, and if so, will you get it right?

In all, I argue that EEMV makes a viable long-term emerging market equity allocation for those who want to decrease their risk while participating in the potential upside from growth and diversification benefits. Kudos to those who reached this conclusion three years ago.



At the time this article was written, the author held no positions in the securities mentioned. Contact Paul Britt at [email protected].


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