Softening An Emerging Market ETF Ride

December 13, 2018

Emerging market ETFs have had a tough year in 2018, but if you owned a low-vol EM ETF this year, the plunge you faced was far less steep. Just know that lower volatility wasn’t the only bet you were making.

Consider the year-to-date performance of the most popular emerging market ETF this year, the iShares Core MSCI Emerging Markets ETF (IEMG)—which has attracted more than $14 billion in new assets—and its low-vol counterpart, the iShares Edge MSCI Min Vol Emerging Markets ETF (EEMV):

 

Chart courtesy of StockCharts.com

 

Volatility

EEMV did exactly what it’s designed to do in markets like we’ve seen this year—offer a smoother, less volatile ride, mitigating some downside risk. The fund is designed to move less than the market in either direction, up or down.

EEMV has annualized volatility of about 13%, compared with 19% for the broader strategy, BlackRock data show. Also, the beta of EEMV to the S&P 500 is 0.77 versus IEMG’s 1.05. A beta of less than 1 means a security is less volatile than the market. In other words, EEMV is as its label suggests: a low-volatility strategy.

But opting for a low-vol fund comes with other size and style bets you should understand as part of your due diligence.

Size & Sector

Using EEMV as an example, the first thing you will notice when comparing EEMV and IEMG’s portfolio is the sheer size difference. IEMG has almost 6 times as many securities in its portfolio—nearly 1,800 in all—versus EEMV’s 287 stocks. EEMV is a far more concentrated emerging market play.

More importantly, in another “size” metric that really impacts portfolio performance, EEMV tilts a lot to a smaller market capitalization than IEMG. The portfolio has a weighted average market cap of $38.8 billion, almost half of IEMG’s average. It is also underweight some of emerging markets’ largest names.

In the universe of emerging market equities, often some of the largest companies are financials, materials, oil and gas companies—higher-beta stocks you may not find in EEMV. Sector tilts also impact portfolio performance.   

“EEMV has more defensive exposures,” said Chris Dhanraj, head of iShares' Investment Strategy at BlackRock. “Our favorite sector for 2019—health care—represents about 5.9% in EEMV versus 2.9% in IEMG. EEMV is lower vol and lower size. It tends to look smaller-cap, and that has helped you in this case.”

“You get more of the domestic story with EEMV,” Dhanraj added.

 

EEMV vs. IEMG Portfolio Breakdown

Sources: ETF.com, FactSet data

 

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