In a year like 2016 when investors have preferred the relative safety of fixed-income ETFs to the risk of equity ETFs—bond funds have gathered the lion’s share of ETF asset flows this year—low-vol funds may offer an appealing level of equity risk in an environment where risk-on is getting so little love.
In emerging markets, there are two main ETFs populating this segment: the iShares MSCI Emerging Markets Minimum Volatility Fund (EEMV | B-70), with $3.3 billion in assets; and the PowerShares S&P Emerging Markets Low Volatility Fund (EELV | C-62), with $175 million in AUM. Both have been around for the better part of five years.
And in the past 12 months, they’ve delivered very similar returns, as the chart below shows:
But so far in 2016, there’s been a growing divergence between EEMV and EELV, with one notably outperforming the other:
Charts courtesy of StockCharts.com
The key for picking which ETF is right for you lies in understanding the differences between the funds. Here are four mains differences to consider:
1. Different equity beta
EEMV owns emerging market equities that, in the aggregate, are expected to be less volatile than the broader emerging equity space.
And compared with the S&P 500, EEMV has an equity beta of 0.95—a beta of 1 means the securities in the portfolio tend to move in tandem with the broad market.
Relative to the MSCI Emerging Markets Investable Market Index, EEMV has an even lower beta of 0.79, according to FactSet data. That means the fund’s returns have noticeably lower sensitivity to what happens in the broader benchmark.
By comparison, EELV, which owns the 200 least volatile stocks of the S&P Emerging BMI Plus Large-Mid Cap Index over the past 12 months, has a beta of 1.10 relative to the MSCI Emerging Markets Investable Market Index, according to FactSet data. That relatively high beta can be tied to the fund’s smaller-cap tilt.
The focus on lower-volatility stocks is designed to offer investors a smoother ride—one that gives up some of the upside for additional protection on the downside. EEMV’s beta is lower than that of EELV.