Tag Archives: nysearcaeelv

ETFs To Play The Market During More Volatile Conditions

The markets are experiencing greater volatility. More conservative investors may take a look at low-volatility ETF related strategies. Low-vol ETF strategies for domestic and international markets. With the sudden bout of volatility shaking up the markets from its listless first half, more conservative investors may consider exchange traded funds that track a low-volatility strategy. Market watchers argue that investors should get used to stock volatility as it is here to stay for some time, reports Michelle Fox for CNBC . Fueling the risk, the escalation in the Greek debt crisis and a major sell-off in Chinese markets sent global markets reeling. “People are not taking a lot of risk right now. There are too many cross-currents right now to really take a big position out there,” Brian Kelly, founder of Brian Kelly Capital, said on CNBC. “Yes, potentially we get some kind of deal in Greece but then it’s unclear exactly what the damage has been done in China.” Consequently, retail investors have been hesitant on joining the market as market swings remain a major concern. Nevertheless, there are a number of low-volatility ETFs available that track more steady segments of the markets. For instance, over the past month, the PowerShares S&P 500 Low Volatility Portfolio ETF (NYSEARCA: SPLV ) , which tracks the 100 least volatile stocks on the S&P 500, rose 1.3% and the iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ) , which selects stocks based on variances and correlations, along with other risk factors, rose 0.9%. In contrast, the S&P 500 has declined 1.2% over the past month. “Low-volatility stocks have historically offered higher risk-adjusted returns than their more-volatile counterparts, suggesting that the market has not offered adequate compensation for incremental risk,” according to Morningstar analyst Michael Rawson. ETF investors can also take the low volatility theme to overseas markets. The low-volatility ETFs have helped soften the blow from the global sell-off. For example, the PowerShares S&P International Developed Low Volatility Portfolio ETF (NYSEARCA: IDLV ) and the iShares MSCI EAFE Minimum Volatility ETF (NYSEARCA: EFAV ) provide a low-volatile option for developed overseas markets. Over the past month, IDLV dipped 2.8% and EFAV fell 1.4% while the iShares MSCI EAFE ETF (NYSEARCA: EFA ) declined 2.9%. Additionally, investors can target emerging market exposure through the iShares MSCI Emerging Markets Minimum Volatility ETF (NYSEARCA: EEMV ) and the PowerShares S&P Emerging Markets Low Volatility Portfolio ETF (NYSEARCA: EELV ) . Over the past month, EELV was down 3.4% and EELV was 3.1% lower while the iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ) retreated 5.2%. Max Chen contributed to this article . Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

EELV Makes The Cut For Consideration, May Be A Good Option For Emerging Market Exposure

Summary I’m taking a look at EELV as a candidate for inclusion in my ETF portfolio. The expense ratio is a little high relative to my cheap tastes, but certainly within reason. The correlation to SPY is low and based on reasonable trade volumes. Returns since inception have been fairly weak, but the measuring period is less than 3 years. The ETF might fit for my portfolio. I’m not assessing any tax impacts. Investors should check their own situation for tax exposure. Investors should be seeking to improve their risk adjusted returns. I’m a big fan of using ETFs to achieve the risk adjusted returns relative to the portfolios that a normal investor can generate for themselves after trading costs. I’m working on building a new portfolio and I’m going to be analyzing several of the ETFs that I am considering for my personal portfolio. One of the funds that I’m considering is the PowerShares S&P Emerging Markets Low Volatility Portfolio (NYSEARCA: EELV ). I’ll be performing a substantial portion of my analysis along the lines of modern portfolio theory, so my goal is to find ways to minimize costs while achieving diversification to reduce my risk level. What does EELV do? EELV attempts to track the total return (before fees and expenses) of the S&P BMI Emerging Markets Low Volatility Index. At least 90% of the assets are invested in funds included in this index. EELV falls under the category of “Diversified Emerging Markets”. Does EELV provide diversification benefits to a portfolio? Each investor may hold a different portfolio, but I use SPY as the basis for my analysis. I believe SPY, or another large cap U.S. fund with similar properties, represents the reasonable first step for many investors designing an ETF portfolio. Therefore, I start my diversification analysis by seeing how it works with SPY. I start with an ANOVA table: (click to enlarge) The correlation is excellent at 70%. I want to see low correlations on my international investments. Extremely low levels of correlation are wonderful for establishing a more stable portfolio. I consider anything under 50% to be extremely low. However, for equity securities an extremely low correlation is frequently only found when there are substantial issues with trading volumes that may distort the statistics. Standard deviation of daily returns (dividend adjusted, measured since April 2012) The standard deviation is a bit high. For EELV it is .8427%. For SPY, it is 0.7420% for the same period. SPY usually beats other ETFs in this regard, so I’m not too concerned about this. Because the ETF has fairly low correlation for equity investments and an acceptable standard deviation of returns, it should do fairly well under modern portfolio theory. Liquidity looks fine Average trading volume isn’t very high, just shy of 60,000, but that isn’t low enough to be a major concern for me. Mixing it with SPY I also run comparisons on the standard deviation of daily returns for the portfolio assuming that the portfolio is combined with the S&P 500. For research, I assume daily rebalancing because it dramatically simplifies the math. With a 50/50 weighting in a portfolio holding only SPY and EELV, the standard deviation of daily returns across the entire portfolio is 0.7304%. With 80% in SPY and 20% in EELV, the standard deviation of the portfolio would have been .7215%. If an investor wanted to use EELV as a supplement to their portfolio, the standard deviation across the portfolio with 95% in SPY and 5% in EELV would have been .7349%. I know it may seem weird that the standard deviation is lowest at the middle level of including EELV, but that is normal for an asset with low correlation but higher standard deviation. Why I use standard deviation of daily returns I don’t believe historical returns have predictive power for future returns, but I do believe historical values for standard deviations of returns relative to other ETFs have some predictive power on future risks and correlations. Yield & Taxes The distribution yield is 2.68%. That appears to be a respectable yield. This ETF could be worth considering for retiring investors. I like to see strong yields for retiring portfolios because I don’t want to touch the principal. By investing in ETFs I’m removing some of the human emotions, such as panic. Higher yields imply lower growth rates (without reinvestment) over the long term, but that is an acceptable trade off in my opinion. I’m not a CPA or CFP, so I’m not assessing any tax impacts. Expense Ratio The ETF is posting .45% for a gross expense ratio, and .29% for a net expense ratio. I want diversification, I want stability, and I don’t want to pay for them. The expense ratio on this fund is higher than I want to pay for equity securities, but not high enough to make me eliminate it from consideration. I view expense ratios as a very important part of the long-term return picture because I want to hold the ETF for a time period measured in decades. Market to NAV The ETF is at a -.47% discount to NAV currently. Premiums or discounts to NAV can change very quickly so investors should check prior to putting in an order. The ETF is large enough and liquid enough that I would expect the ETF to stay fairly close to NAV. Generally, I don’t trust deviations from NAV. If I can buy an ETF at a discount to NAV, I consider that to be a favorable entry price. Largest Holdings The diversification is very good in this ETF. If I’m going to be stuck with that expense ratio, I expect it to buy a fairly strong level of diversification. This ETF is providing a good level of diversification to give some justification to the expense ratio. (click to enlarge) Conclusion I’m currently screening a large volume of ETFs for my own portfolio. The portfolio I’m building is through Schwab, so I’m able to trade EELV with no commissions. I have a strong preference for researching ETFs that are free to trade in my account, so most of my research will be on ETFs that fall under the “ETF OneSource” program. The correlation and diversification are great. The discount to NAV is also very appealing, but those discounts can disappear quickly. The net expense ratio isn’t too bad, though the gross expense ratio is less attractive. I might dig into the difference if I was considering a large position to determine how sustainable it would be. Since the ETF is covering emerging markets, I wouldn’t want to go more than 10% into the ETF because of the risks that I believe are present there. On the other hand, we saw that the portfolio had a lower standard deviation when this ETF was 20% of the portfolio rather than 5% because of the low correlation. I’ll need to test EELV in hypothetical portfolios that are more diversified to see how it does there. I think this one is worth considering for the 5% to 10% exposure to emerging markets. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis. The analyst holds a diversified portfolio including mutual funds or index funds which may include a small long exposure to the stock.

A Comparison Of 3 Emerging Market Low Volatility ETFs

Summary Emerging markets have returned twice the U.S. markets over the last 11 years, but have struggled recently. Emerging markets are now very cheap, but investors may be put off by their higher volatility. Do low volatility emerging market funds deliver? Introduction Some years ago, emerging markets were all the rage. According to MSCI , emerging markets grew from 1% of the global market cap in 1988 to 11% in 2013. An investor who bought into iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ) 11 years ago would have been rewarded with nearly a 400% gain, far ahead of S&P 500 (NYSEARCA: SPY ) (199%) and developed markets ex-U.S. (NYSEARCA: EFA ) (166%). EEM Total Return Price data by YCharts However, the above chart belies the fact that emerging markets have not performed well since the end of the financial crisis. Since 2009, EEM has returned only 72%, compared to 189% for SPY and 94% for EFA. EEM Total Return Price data by YCharts Given their relative underperformance over the past several years, is now the time to take a second look at emerging markets? Most analysts and fund managers are pessimistic on the prospects of emerging markets in 2015, which could actually be a contrarian signal. A recent Seeking Alpha article by Elite Wealth Management reported that in a November survey of fund managers with a combined $700 billion in assets, they were 0% overweight in emerging market equities, compared to 45% Japan, 25% U.S. and 8% Europe. Emerging markets are now very cheap. The table below shows the P/E ratios and dividend yields for the top 10 countries in EEM, compared to selected developing markets (source: Financial Times ). Also shown for the emerging market countries is the weight of that country in EEM. Country Weight % P/E Dividend yield % China 17.52 7.1 4.4 South Korea 13.64 15.6 1.2 Taiwan 12.20 13.9 3.0 Brazil 7.82 12.4 4.6 South Africa 7.75 16.4 3.1 India 6.69 18.2 1.6 Mexico 5.05 21.2 2.0 Russia 3.94 5.5 5.6 Malaysia 3.66 15.7 3.2 Indonesia 2.66 18.3 2.2 U.S. – 19.0 2.3 Japan – 16.5 1.7 U.K. – 15.9 3.3 Germany – 16.1 2.6 Canada – 17.9 2.8 We can see that the 9 out of the 10 emerging market economies have a P/E ratio lower than the U.S. (19.0). Only Mexico (21.2) has a higher P/E ratio than the U.S.; China and Russia have the lowest P/E ratios of 7.1 and 5.5, respectively. The following table shows the valuation ratios for ETFs of major world regions (data are from Morningstar and are forward-looking). Region ETF P/E P/B P/S P/CF Yield % U.S. SPY 18.03 2.48 1.78 7.77 2.08 Europe (NYSEARCA: VGK ) 16.19 1.74 1.04 6.96 3.21 Japan (NYSEARCA: EWJ ) 15.23 1.21 0.77 4.89 1.62 Asia ex-Japan (NASDAQ: AAXJ ) 12.68 1.39 1.17 6.05 2.43 Emerging Markets EEM 12.76 1.49 1.14 4.91 2.56 We can see from the data above that Asia ex-Japan and emerging markets have the lowest valuation metrics amongst the world regions. However, it might be argued that developed markets deserve a valuation premium over emerging markets due to their higher stability (see reasons below). Moreover, emerging markets have always had higher volatility compared to developed markets. This is likely due to a multitude of factors, such as less stable corporate and sovereign governance, less stable currency, smaller economies, reliance on foreign investment, and concentration in cyclical industries such as mining and energy. The below chart shows the volatility and beta values for EEM compared to SPY and EFA over the past 6 years. EEM 30-Day Rolling Volatility data by YCharts Low-volatility emerging market funds Would low-volatility emerging market (EM) funds be ideal for investors wanting some exposure to emerging markets, but with lower volatility? To my knowledge, there are three low-volatility EM funds on the market: EGShares Low Volatility EM Dividend ETF (NYSEARCA: HILO ), PowerShares S&P Emerging Markets Low Volatility Portfolio (NYSEARCA: EELV ) and iShares MSCI Emerging Markets Minimum Volatility (NYSEARCA: EEMV ). In a previous series of articles , we compared several high-dividend low-volatility U.S.-based funds. We found that those funds were able to achieve their dual objectives of high dividends and low volatility by overweighting mature and defensive industries such as utilities, healthcare and real estate. This article seeks to compare the three low-volatility EM funds. Note that this will be more of an overview of the three funds and rather than an in-depth analysis of a single fund. Fund details Details for the three low-volatility EM funds and EEM are shown in the table below (data from Morningstar). HILO EELV EEMV EEM Yield 4.63% 2.68% 2.59% 1.69% Expense ratio 0.85% 0.29% 0.25% 0.67% Inception Aug 2011 Jan 2012 Oct 2011 April 2003 Assets $32.1M $206.2M $1.90B $31.96B Avg Vol. 28.4K 49.9K 306K 60.6M No. holdings 30 187 243 817 Annual turnover 137% 101% 34% 22% EEM is by far the most massive fund, with nearly $32B in assets. The other three low-volatility EM funds have a wide variation in size. EEMV has $1.90B in assets, followed by EELV at $206.2M in assets. Surprisingly, HILO only has $32.1M assets even though it is the oldest of the three low-volatility funds. The volumes of HILO and EELV border on the low end, with only 28.4K and 49.9K shares changing hands a day, respectively. We can also see that HILO has the highest yield (4.63%) out of the three low-volatility EM funds and EEM, which is not surprising given that it’s also a dividend fund. The other two low-volatility EM funds, EELV (2.68%) and EEMV (2.59%), also have higher dividends than EEM (1.69%). Both HILO and EELV have very high turnovers of 137% and 101%, respectively. EEMV and EEM have lower turnovers of 34% and 22%, respectively. In terms of expense ratio, HILO is the most expensive ETF, with a fee of 0.85% per annum. EELV and EEMV are much cheaper, with expense ratios of 0.29% and 0.25%, respectively. EEM charges 0.67% in expenses, which seems very high for a “vanilla” equity fund. This is probably why Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ) has outgrown EEM even though it was incepted two years later. VWO charges only 0.15% in fees and has accumulated over $45B in assets. Overlap The following table illustrates the overlap between the three low-volatility EM funds and EEM. Overlap statistics were obtained from ETF Research Center . HILO EELV EEMV EEM HILO – 5% 7% 2% EELV 5% – 37% 27% EEMV 7% 37% – EEM 2% 27% 31% – We can see that HILO has the lowest overlap compared to the other two low-volatility EM funds. This is probably because HILO also has a dividend focus in addition to its low-volatility theme. EELV and EEMV have the highest overlap, at 37% of total assets. Performance The graph below shows the performance of the three low-volatility EM funds and EEM since Jan 2012 (2 years). HILO Total Return Price data by YCharts We see quite a disparity between the performance of the three funds and EEM over the past 2 years. Both EEMV and EELV have managed to beat the benchmark EEM (6.23%). EEMV exhibited the best 2-year performance of 20.64%, while EELV returned 8.87%. On the other hand, HILO recorded the worst performance of -9.53%. The following table shows further performance and risk data for HILO, EELV, EEMV and EEM. Data are from Morningstar, except for volatility (2Y) and beta (2Y) which are from InvestSpy . HILO EELV EEMV EEM 1-year return % -12.21 -4.14 1.96 -0.94 3-year return (ann.)% -3.42 – 6.18 2.91 Volatility (2Y) % 15.6% 13.5% 13.7% 18.0% Beta (2Y) 0.94 0.80 0.87 1.17 Sharpe ratio (3Y) 0.01 – 0.77 0.37 We can see from the data above that despite their disparate performances, all three low-volatility funds have succeeded in achieving lower volatility than EEM over the past 2 years. Valuation The table below shows various value and growth metrics for HILO, EELV, EEMV and EEM. Data for all funds are from Morningstar (value metrics including dividend yield are forward looking). The first five rows can be considered as value metrics while the last five rows can be considered as growth metrics. HILO EELV EEMV EEM Price/Earnings 11.31 14.45 15.69 12.76 Price/Book 1.27 1.48 1.86 1.49 Price/Sales 0.99 1.18 1.51 1.14 Price/Cash Flow 5.42 5.18 7.38 4.91 Dividend yield % 9.96 3.09 2.81 2.56 Projected Earnings Growth % 11.23 12.34 10.97 11.76 Historical Earnings Growth % 0.73 11.05 5.06 -1.68 Sales Growth % 12.97 -17.34 -15.60 -13.79 Cash-flow Growth % 7.40 3.77 6.36 7.85 Book-value Growth % 8.70 -22.75 -26.56 -21.57 We can see from the table above that EELV has similar valuation metrics to EEM, while EEMV is slightly more expensive than EEM. On the other hand, HILO appears to be the cheapest out of the four funds. Interestingly, the current valuation of the four funds is inversely proportional to their performance over the past two years. HILO, the most “valuey” fund, has had the worst performance in the last two years, while EEMV, the most expensive fund, has done the best. The funds also appear to have many negative growth metrics, which could be due to the effect of a global slowdown on the growth of many emerging market economies that rely heavily on exports or foreign investment. Countries Perhaps the most important factor that would affect the performance of these EM funds is the distribution of the constituent countries in the fund. The following table shows the top 10 countries in each of the three low-volatility EM funds and EEM (data from ETF Database ). HILO EELV EEMV EEM Country Weight Country Weight Country Weight Country Weight Thailand 13.23% Taiwan 27.68% China 22.74% China 17.52% Malaysia 12.61% Malaysia 18.62% Taiwan 17.37% South Korea 13.64% China 12.54% South Africa 13.66% South Korea 9.40% Taiwan 12.20% Brazil 9.60% South Korea 9.30% Malaysia 8.80% Brazil 7.82% Mexico 8.23% Other 9.23% South Africa 5.50% South Africa 7.75% Czech Republic 7.36% China 5.08% Indonesia 4.88% India 6.99% Indonesia 6.96% Brazil 4.47% Brazil 4.44% Mexico 5.05% Chile 6.57% Mexico 3.83% Chile 4.21% Russia 3.94% Poland 5.10% Thailand 2.97% Philippines 3.75% Malaysia 3.66% United Arab Emirates 4.01% Chile 2.83% Qatar 2.80% Indonesia 2.66% The following graph shows the allocation of the four funds to the ten most represented countries in the funds. Size The table below shows the size distribution for the four EM funds (data from Morningstar). HILO EELV EEMV EEM Giant 24.18 26.03 34.16 50.62 Large 11.85 51.75 49.84 37.00 Mid 52.55 22.22 15.40 11.87 Small 9.20 0 0.61 0.44 Micro 2.22 0 0 0.08 And in graphical form: We can see that HILO has a rather interesting size distribution, with more giant and medium-cap stocks compared to large-cap stocks. EELV and EEMV have similar size distributions, with about 50% in large-cap stocks, 30% in giant-cap stocks and 20% in mid-cap stocks. On the other hand, EEM is tilted towards giant-cap stocks. Sector The final aspect to look at for the EM funds is their sector diversification. The following table shows the sector composition of HILO, EELV, EEMV and EEM. Data are from Morningstar. HILO EELV EEMV EEM Basic Materials 8.47 9.41 3.9 7.93 Consumer Cyclical 5.74 10.71 6.32 8.46 Financial Services 16.64 37.14 26.44 25.43 Real Estate 5.68 3.05 1.06 2.44 Communication Services 19.52 8.97 12.98 7.76 Energy 6.08 4.1 3.13 7.51 Industrials 24.19 7.87 7.66 5.73 Technology 0 3.77 13.03 20.9 Consumer Defensive 0 9.21 11.54 8.3 Healthcare 3.64 1.46 6.62 2.24 Utilities 10.05 4.31 7.92 3.31 And in graphical form: We can see from the data that financials make up a high allocation of all four EM funds, with EELV having the highest allocation at 37.14% and HILO having the lowest at 16.64%. HILO has the highest allocations to industrials (24.19%) and communication services (19.52%). The following graph shows the sector distribution of the four funds (individual sectors are not marked). We can see that EEMV and EEM have the most even sector distributions of the four funds. Conclusion All three low-volatility EM funds have managed to deliver lower volatilities over the past 2 years (compared to EEM), but with wildly disparate performances. EEMV exhibited the best 2-year performance of 20.64%, while EELV returned 8.87% and HILO returned -9.53%. If I had to pick a low-volatility EM fund, I would probably pick EEMV for the following reasons: It has the best performance record over the past two years while still recording lower volatility than EEM. Its three highest allocations are to China, Taiwan and South Korea, which are all in the top 5 of the cheapest emerging market countries. It has the lowest expense ratio (0.29%) out of all the EM funds studied. It has better sector distribution compared to HILO or EELV.