EFAV iShares MSCI EAFE Min Vol Factor ETF

Recent market twirls resulting from worries over the gradual cease in cheap-dollar inflows, emerging market lull, unfavorable currency translation and still-recovering sovereign debt problems in Europe have left investors jittery about the safety of their portfolios and brought low volatility ETFs back into the spotlight. 

Gauging this market sentiment, iShares filed for three minimum volatility ETFs targeting Europe, Japan, and an all country Asia excluding Japan one as well (read: Hedge Your Portfolio with Low Volatility ETFs).     

Proposed Funds in Focus

The iShares MSCI Europe Minimum Volatility ETF, The iShares MSCI Japan Minimum Volatility ETF and The iShares MSCI All Country Asia ex Japan Minimum Volatility ETF look to rest on their respective geographies with the same lower volatility investing proposition. The trio seeks to exhibit lesser volatility, in aggregate, relative to their broader market plays.

The three passively managed funds will track the MSCI Europe Minimum Volatility (USD) Index, the MSCI Japan Minimum Volatility (USD) Index and the MSCI AC Asia ex Japan Minimum Volatility (USD) Index.

Indexes for three cases are capitalization-weighted and pursue rules-based methodologies to settle on weights for securities. The index intends to minimize total risk of the MSCI Europe Index, the MSCI Japan Index and the MSCI AC Asia ex Japan Index.  

Geographically, the European ETF will be exposed to 14 developed nations including Belgium, Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands, Norway, Portugal, Sweden, Spain, Switzerland, and the United Kingdom. The underlying Index mainly includes consumer staples, healthcare, and financials companies in Europe (read: 3 Top Ranked Europe ETFs to Buy Now).

Constituents of the Japan ETF largely comprise industrials, consumer discretionary, and financials companies, while components for Asia Ex-Japan ETF chiefly takes in financials, information technology, industrials and telecommunications companies.

Region-wise, the index for Asia Ex-Japan ETF is open to nations like China, Hong Kong, India, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand  (read: Is Another Great Year Ahead for Japan ETFs?). 

How could it fit in a portfolio?

Global equity markets kicked off 2014 in a chaotic manner and are expected to remain volatile in the near term. Vagueness in the pace of the Fed’s QE taper and the resultant impact on global currency market, mixed bag data on otherwise improving European front, are all hinting at the looming market volatility in the global arena.

In such a backdrop, the proposed products could be interesting picks for those who want to stay invested in worldwide risky assets, but seek minimum volatility. Low volatility ETFs generally tend to diminish risk and offer decent returns, if not great, while ETFs with higher beta stocks face higher losses (read: Are Low Volatility ETFs Capable of Big Gains?).

ETF Competition

The international low volatility ETF space is not highly crowded thus leaving leeway for the proposed funds to garner investors’ money.

Though the proposed ETFs do not have any direct competitor as such in terms of regional focus, some prominent names in the space include the iShares MSCI Emerging Markets Minimum Volatility Index Fund (EEMV), iShares MSCI Emerging Markets Minimum Volatility Index Fund (ACWV), iShares MSCI EAFE Minimum Volatility Index Fund (EFAV), PowerShares S&P Emerging Markets Low Volatility Portfolio (EELV) and PowerShares S&P International Developed Low Volatility ETF (IDLV).

All have at least $150 million in assets under management with EEMV leading the pack with around $2.0 billion in assets accumulation, so far. Expenses ratios charged by these products range from 20 bps to 35 bps and the yield offered by the group averages out 2.50% (as of February 25, 2014).

Therefore, in order to show up in the space, the newly filed funds will have to promote their ‘region specific’ nature. Also, the planned funds should charge competitively and yield impressively to amass investors’ dollars.

However, with three iShares funds in the international low volatility space already taking top three places in the AUM list, we believe the issuer’s new set of ETFs could find a home by relying on their regional focus. This could be the way to assets, as no other products have such a regional focus right now with a low volatility metric as well.

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ISHARS-MS ACW (ACWV): ETF Research Reports
 
PWRSH-SP EM LVP (EELV): ETF Research Reports
 
ISHARS-MS EMMV (EEMV): ETF Research Reports
 
ISHARS-MS EMVIF (EFAV): ETF Research Reports
 
PWRSH-SP ID LVP (IDLV): ETF Research Reports
 
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