Low-Volatility ETFs: Good for the Risk-Averse
Mary is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
One of the newest things on the market is low-volatility ETFs. They are nice for squeamish investors looking to get in on emerging markets or in Europe's current economic crisis. Emerging markets have long been thought to be exclusive to the investor with a strong appetite for risk. With the current economic crisis in Europe, the same could be said for them as well. The volatility in the global markets can make one wary of opening themselves up to too much risk. This can lead to some highly limited, low diversification portfolios. Low-volatility ETFs provide a solution to that problem. There are already several out there that are performing fairly well.
The iShares MSCI Emerging Markets Minimum Volatility Index (NYSEMKT: EEMV) provides just this type of exposure. This fund was just launched in October, but is already enjoying one of the strongest returns in this niche market. The ETF has risen more than 12% this year. EEMV provides exposure to 21 emerging markets with the greatest attention being given to Asia and Latin America. This is a great way to gain exposure to emerging markets and diversify your portfolio without all of the risk and price fluctuations that are inherent in these markets.
One of EEMV's competitors is the PowerShares S&P Emerging Markets Low Volatility Portfolio (NYSEMKT: EELV). EELV is up 9.4% since it was launched in mid-January. EELV measures the performance of 200 of the S&P Emerging BMI plus LargeMid Cap Index. Similar to EEMV it provides a large amount of exposure to Asia and Latin America. However, EELV also provides a significant amount of exposure to Africa, diversifying your portfolio even further.
The iShares MSCI All Country World Minimum Volatility Index (NYSEMKT: ACWV) is already by 5.6% this year. ACWV provides exposure to 45 developed and emerging markets. While not limited to emerging markets like EEMV and EELV, this ETF still provides a fair amount of diversity for any portfolio. And the limited exposure to emerging markets only serves to leverage the risk even further. U.S. companies make up nearly half of this ETF's holdings, minimizing diversity and risk.
The Russell Developed ex-U.S. Low Volatility ETF (NYSEMKT: XLVO), which screens out U.S. stocks, has risen 4.5% so far this year. This ETF, however, focuses its goals within developed markets. Europe accounts for approximately 50% of the firm's holdings. In addition, the majority of the ETF's holdings are large cap companies. While this ETF does not provide much in the way of diversity it does still offer a low-volatility, low-risk option for the cautious investor.
Perhaps the most successful low-volatility ETF is the PowerShares S&P 500 Low Volatility Portfolio (NYSEMKT: SPLV). It is also arguably the simplest. It holds the 100 S&P 500 stocks with the smallest price fluctuations in the past year. The ETF has risen 3.2% already this year. In addition to being the most successful low-volatility ETF, it is also probably the least diversified ETF. Its focus is geared toward U.S. large cap stocks.
So you see, there is a low-volatility option available for every investor's appetite. EEMV and EELV focus on emerging markets. Then there are those such as SPLV whose main focus is low volatility. Low-volatility ETFs level the playing field so to speak. They just go to show that having a diversified portfolio doesn't always mean having a highly volatile portfolio, which most consider to be extremely risky. One of the great lures of low-volatility ETFs is the buy them and hold them mindset. Over long periods of time these ETFs have proven comparable to the market of the whole. They just exclude all the volatility in between.
MaryPosey has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.