Min Vol For Emerging Markets?

A fund that isn’t often discussed has been pulling in major assets lately. During May, the $5.9 billion iShares MSCI Emerging Markets Min Vol Factor ETF (EEMV) added nearly $2.4 billion in flows.  

During the same month, the $122.4 billion iShares MSCI Emerging Markets ETF (EEM) actually lost $56 million. In fact, EEMV was ninth out of the top 10 funds for inflows during the month. Notably, it had $3.8 billion at the end of 2021.  

With most investors anticipating recession in the U.S., an ETF that offers exposure to emerging market stocks but looks to tamp down on the volatility associated with such markets likely has a certain appeal.  

Investors tend to turn to emerging markets for their less correlated returns and growth potential. But there is a higher risk level that comes with those possible benefits. A minimum volatility strategy has the potential to remove—or at least mitigate—some of that risk. Certainly, EEMV’s performance has outstripped the broader EEM’s performance. 

Over the three-month period, EEMV was down just 6.88% versus a slightly steeper decline of 6.96% for EEM. Year to date, the gap has widened further, with a -8.39% decline for EEMV versus a 13.27% decline for EEM. And over the 12-month period, EEMV is down 9.52% while EEM is down 22.16%.  

Even over longer-term periods, EEM was ahead, with a 3.21% annualized return to EEMV’s 2.45%, but over the five- and 10-year annualized periods, EEMV once again outperformed, with returns of 3.06% and 3.67% for EEMV versus 2.42% and 3.6% for EEM. 

EEMV has the same parent index as EEM, but its portfolio is optimized for the lowest absolute volatility. As a result of this optimization, EEMV’s portfolio of 312 holdings is far more concentrated than EEM’s 1,179 holdings. There is only one holding in common among the top 10 of the two ETFs: Taiwan Semiconductor Manufacturing is the largest holding in EEM, with a weight of 6.75%, while it is the 10th largest holding in EEM, with a weighting of just 1.41%.  

Country and sector weightings are also somewhat different between the two funds. Taiwan (18.39%), Hong Kong (16.96%) and India (14.18%) are the three largest countries in EEMV, while Hong Kong (25.41%), Taiwan (15.4%) and India (12.97%) are the largest countries in EEM.  

Finance is the largest sector for both ETFs, with a 25.46% weight in EEMV and a 23.89% weight in EEM. Communications claims the No. 2 spot for sectors in EEMV with a weighting of 13.84%, but it has a weight of just 3.43% in EEM, and it’s barely in the top 10 sectors for the fund.  

Electronic technology is the second largest sector in EEM, with a weight of 18.23%; it’s the fourth largest sector for EEMV. But both funds also have the same sector in the No. 3 position, with EEMV weighting technology services at 7.99% and EEM weighting it at 10.96%.  

But the real differentiation is easiest to see in the funds’ factor exposures. Unsurprisingly, low volatility is the largest factor loading for EEMV, at 0.65. For EEM, exposure to the same factor is -0.09. EEMV’s second largest factor loading is to quality, at 0.30, while for EEM it is 0.04. EEM has a factor loading of -0.39 to low size, and a loading of -0.21 to momentum.  

What’s clear is that EEMV is a very differentiated fund from EEM, the iconic ETF for emerging markets. Its portfolio is much narrower, with very different factor loadings. Given its performance over the past 12 months and the longer term, it’s not surprising that the fund has accumulated significant assets during the year.  

And given the dismal performance of the U.S. market this year, down more than 13% year-to-date to EEMV's 8.31% loss, it’s not like EEMV has to deliver outsized returns; it just has to outperform by a reasonable margin.

Contact Heather Bell at [email protected]