Global markets faced weakness to start the year thanks to worries over the slow-but-steady withdrawal of QE support in the U.S., a likely emerging market slump, and deflationary worries in Europe. Several corners of the market have witnessed modest sell-offs as investors were worried about going over the ledge, opting instead for safe havens.
Due to this sentiment, iShares introduced three low volatility ETFs from different corners of the world. These ETFs targeting Europe, Japan, and all-country Asia excluding Japan hit the market on June 5 (read: 3 Low Risk ETFs for a Stormy Market).
Newly Launched ETFs in Detail
The iShares MSCI Europe Minimum Volatility ETF, trading under the symbol of EUMV, The iShares MSCI Japan Minimum Volatility ETF, trading under the symbol of JPMV, and The iShares MSCI All Country Asia ex Japan Minimum Volatility ETF, trading under the symbol of AXJV, look to play their respective geographic regions with lower levels of volatility. The trio seeks to exhibit lesser volatility relative to their broader market plays.
iShares MSCI Europe Minimum Volatility ETF (EUMV - ETF report): The fund targets the MSCI Europe Minimum Volatility (USD) Index which gives investors access to the European equities with reduced amount of risks. In terms of sector exposure, EUMV is almost equally concentrated in financials (17.32%), consumer staples (16.1%) and healthcare (15.9%) while telecom (10.4%), and utilities (9.2%) round out the top five sectors. The fund charges investors 25 basis points a year in fees.
In terms of geographical breakdown, EUMV is heavy on the UK. Beyond British securities, Swiss companies takes over 17% of assets followed by French and German firms with respective exposures of 10.3% and 9.9%.
Individual holdings wise, the fund is quite diversified considering no stock accounts for more than 1.70% of the basket. Top three holdings – Smith & Nephew Plc, SGS S.A., and Coloplast combine to take up roughly 4.85% of assets.
iShares MSCI Japan Minimum Volatility ETF (JPMV - ETF report): The fund looks to track the MSCI Japan Minimum Volatility (USD) Index opening the doors to the Japanese stocks for investors. Sector-wise, industrials and consumer discretionary – the top two sectors of the fund – each makes up over 20% of assets. Financials (14.7%) and consumer staples (12.0%) round out the top four positions. The fund charges 30 bps in fees.
This fund also does not have any company-specific concentration risk as top three individual holdings – Oriental Land Co., Toyota Motor Corp. and Nippon Telegraph & Telephone Corp. make up only 4.77% of the fund (read: Japan ETFs: One Year After Abenomics).
iShares MSCI All Country Asia ex Japan Minimum Volatility ETF (AXJV - ETF report): This fund follows the MSCI AC Asia ex Japan Minimum Volatility (USD) Index and intends to offer better risk-adjusted returns to investors. As per iShares, the fund is heavy on emerging market nations like China and South Korea while sectors like financials, technology and telecom take up big chunks. AXJV has about 174 securities in total in its basket and charges 35 bps in fees for its service.
How could they fit in a portfolio?
Volatility has become the name of the investing game. Per iShares, the volatility of the S&P 500 index has seen a steep upward movement over the past decade in contrast to the historic average.
Either ongoing or expected changes in monetary policy in various regions and the resultant impact on global markets as well as mixed bag data on otherwise recovering developed nations are suggesting that more volatile trading could be ahead for world markets.
This has caused many investors to seek refuge in low risk products rather than sticking to highly volatile options and waiting out the storm. In such a backdrop, the newly launched products could be intriguing choices for those who want to stay invested in worldwide equities, but like the idea of focusing on minimum volatility. Low volatility ETFs generally tend to offer positive risk-adjusted returns, though not astronomical (read: 3 Low-Risk ETFs Beating SPY This Year).
The international low volatility ETF space is not packed yet, thus leaving room for the proposed funds to garner investors’ money. Moreover, iShares has already made a name for itself in the minimum volatility ETF pack as the issuer rolled out iShares MSCI Emerging Markets Minimum Volatility Index Fund (EEMV), iShares MSCI All Country World Minimum Volatility Index Fund (ACWV) and iShares MSCI EAFE Minimum Volatility Index Fund (EFAV) in 2011.
The trio has also seen a surge in popularity since inception having amassed more than $1 billion in assets. We expect iShares to be able to repeat this success in the minimum volatility space.
There are two other well-known names in the space – PowerShares’ S&P Emerging Markets Low Volatility Portfolio (EELV) and PowerShares S&P International Developed Low Volatility ETF (IDLV), which are, however, way behind the iShares products. Both these have amassed AUM of about $220 million.
Expenses ratios charged by these products range from 20 bps to 35 bps which are in line with the fees charged by the newly launched ETFs (read: 3 Low Risk ETFs for Market Turmoil).
However, there is one concern for the issuer. The new entrants might cannibalize the market of their older iShares cousins. On the other hand, the new funds might falter initially due to the existing iShares products.
Though the chance of this happening is meager, it is better to sell the ‘region specific’ nature for the newly launched ETFs. This could be the best way to accumulate assets, as no other product has such deep regional focus right now along with a focus on the low volatility metric.
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