What’s The Best Minimum Volatility ETF?
August 08, 2012
As investors pile into the debt markets to search for yield in the midst of uncertainty, equities aren’t getting the love they deserve. Minimum volatility plays might be the key to restoring that love.
As the markets continue to digest the ongoing crisis in Europe, unemployment figures, and whether or not central bank action will come to fruition—high beta equities aren’t necessarily the best bet for some. That’s where minimum volatility ETFs come into play.
Minimum volatility ETFs hold lower beta stocks relative to their targeted benchmark. The idea is that investors get exposure to a portfolio with minimized risks—as well as returns. The highs aren’t so high, but the lows aren’t too low either.
Earlier this year, my colleague Paul Baiocchi professed his love for the PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV). However, there are 6 other funds that aim to provide the same strategy to investors.
Deciding on the best fund depends on the exposure you’re targeting. Although there are only seven funds available in the space, exposure ranges from U.S. large-caps to global total market exposure.
The iShares MSCI All Country World Minimum Volatility Fund (NYSEArca: ACWV) is currently the only fund that targets the global equity space by selecting its holdings from the MSCI All Country World Index. Like most of the minimum volatility funds, it’s prone to sector biases—consumer staples and health care stocks accounting for nearly a third of the fund. Still, at 35 bps, ACWV is competitive in pricing relative to other total market equity ETFs. Year-to-date, the fund has slightly underperformed the MSCI ACWI Index. However, it showed its true strength during the pullback that started in late April.
In the emerging markets space, investors have two funds at their disposal—the PowerShares S&P Emerging Markets Low Volatility Fund (NYSEArca: EELV) and the iShares MSCI Emerging Markets Minimum Volatility Fund (NYSEArca: EEMV). Differences in costs are minimal. EELV’s expense ratio of 29 bps is 4 bps more expensive than EEMV. However, EEMV is much more liquid than EELV, with over 40,000 shares changing hands per day. Both funds are heavily exposed to financials and consumer non-cyclicals, and both contain exposure to South Korea—a country some consider to be a developed economy. EELV does a better job of avoiding South Korea, with only 3 percent invested versus 10 percent in EEMV.