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Low Risk And Long-Term Success Portfolio Update 2015

2015 will be a year of minimal returns for broad S&P 500 funds, but will be a good year for international funds and gold. High yielding investments in vehicles such as REITs could see lots of volatility due to interest rate risks. Investors should consider taking some profit off of U.S. equities and diversifying internationally to take advantage of lower valuations and room for P/E expansion. The last few years have been fantastic for exchange-traded funds (ETFs), according to data accessed by ETF.com. In fact, U.S. stock ETFs have surpassed last year’s inflow records, and for the first time ever, U.S. ETFs have surpassed $2 trillion. A popular S&P 500 ETF, the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ), has seen the heaviest inflows at nearly $25 billion in 2014. In contrast, emerging market ETFs (NYSEARCA: EEM ) and gold ETFs (NYSEARCA: GLD ) have seen outflows. This marks a perfect opportunity for a trite quote from Warren Buffet, “Be fearful when others are greedy and greedy when others are fearful.” My theory is that many investors have missed out on the upswing of the market and are now “performance chasing” because they feel left out. I am taking the contrarian position and urging to shift some money out of direct investments in the U.S. equity market, and consider larger allocations to international markets, and even emerging market exposure. The original portfolio I created on April 9, 2013, can be accessed here . My portfolio has underperformed the S&P 500 by a significant extent; however, the portfolio I created also contained 18% allocation to bonds, 17% international exposure, emerging markets, and gold. This diversification has led to lackluster performance as the S&P has surged. Keep in mind this is not a portfolio built for everyone. Based on your tolerance for risk and your investment objectives, the amount of money you allocate to certain asset classes must make sense for your goals. In my asset allocation methodology for this year and beyond, I am making some key assumptions that are worth noting. Firstly, I believe the market is fairly valued to slightly overvalued based on historical price-to-earnings ratios. Due to the low interest rate environment, low inflation rate, and the quantitative easing actions of the Federal Reserve, I believe that inflated price-to-earnings ratios makes sense. With that being said, I feel that rates will increase to some extent in this year and that investors seeking high yield investments should be wary. Instead of riding out the high yield environment, my first action will be to remove the allocation to the Vanguard REIT Index ETF (NYSEARCA: VNQ ), and keep my position in the Vanguard High Dividend Yield ETF (NYSEARCA: VYM ). The reason that I am not recommending a reduction in VYM is because of the amount of high quality value stocks found in this fund. What I am certain many people hear all too often are obscure references to the stock market stating it is too high or too low. What I rarely hear are defined examples of why they believe the market is high or low, or by what measuring stick they are referencing. I tend to favor the simplistic. A quick answer to the “Why?” that many investors ask is an indicator of market valuation by economist and well-known author of Irrational Exuberance – Robert Shiller. The Shiller price-to-earnings ratio is calculated using the annual earnings of the S&P 500 over the past 10 years. The past earnings are adjusted for inflation using CPI, bringing them to today’s dollars. The regular price-to-earnings ratio is just shy of 20, which is right at the historical average. (click to enlarge) Based on this information, I believe the market is fully valued. Most agree with the contention that the price-to-earnings ratio of the S&P isn’t trading at a huge bargain. The actions of the Federal Reserve may push the S&P to further valuations above historical averages. My personal view is that while you cannot time the market, you also should avoid pouring into the market when it appears fully valued as many appear to be doing. In fact, at this point I would be doing the opposite of the crowd. Emerging markets and precious metals offer value, and I believe smart money is moving into these asset classes. Using the proceeds from my sale of VNQ, I would purchase the Schwab International Equity ETF (NYSEARCA: SCHF ). This is an international large blend style ETF, sector weighted in financials at an expense ratio of only .08% that will reward patient investors in the long run. I also like that their top holding is Nestle SA ( OTCPK:NSRGY ). The regional breakout provided by Morningstar is roughly 18% exposure to the United Kingdom, 37% exposure to Europe developed, 20% exposure to Japan, 7% Australia, 8% Asia developed, and 8% to the U.S. Gold and the U.S. dollar are inversely related, as you can see from the chart from Macrotrends . While I do not believe gold will experience incredible growth and I cannot promise grandeur, I do believe gold should be a part of your portfolio. I will trust my judgement to raise my portfolio bet in gold to 4% from 3% in my theoretical portfolio. (click to enlarge) Oil seems to be a hot topic today so I wouldn’t want to ignore it in my portfolio construction. While I cannot predict the future – I tend to bet that things “return to normalcy” over the long haul. Thus, my view is that oil will return to a pricing level around $75-$85. In the passive investing space, I am not making an actionable bet on the price action of oil. However, I do believe an opportunity exists for active investors who are diligent about researching quality businesses that are now discounted due to the fall in oil prices. One example I found was Schlumberger Limited (NYSE: SLB ). In another article , I discuss the benefits of individual selection in the oil and gas space. (click to enlarge) In my original portfolio, I made favorable S&P sector bets in the Utilities (NYSEARCA: XLU ) and Health Care (NYSEARCA: XLV ) sector ETFs. In the sector rotation model, it is clear that these two outperformed in the last year, signaling a potential business cycle decline. I do not live or die by sector rotation investing strategies; however, I do not think they should be ignored completely. I tend to look at the relative valuation of companies by sector and make my own judgments as to whether or not they are fairly valued. Interestingly, the financial sector does seem to be an unloved sector which could provide excess returns. Bill Nygren, a fund manager that I follow from Oakmark, is also overweight financials. With a belief that interest rates will rise, supporting sector rotation modeling, and the support of a successful value investing manager, I can remove the clouds and make a clear decision to shift my sector bet from Utilities to Financials (NYSEARCA: XLF ). I am holding onto Health Care because the long-term outlook remains positive. A close third would be the Technology sector (NYSEARCA: XLK ). In summary, I would sell my position in the high yield REIT ETF and use the sources to purchase SCHF to gain more international exposure. I would sell the Utilities sector ETF and purchase the Financials sector ETF with the proceeds. I would also sell a portion of my position in the Vanguard Short-Term Bond ETF (NYSEARCA: BSV ) and purchase additional amounts of the gold ETF until I reach the 4% of total portfolio allocation mark. Given the facts of today, I can only make what I feel is the best decision possible given a certain risk tolerance and investment objective. I hope you find this article useful as you too adjust your portfolio to the current market conditions. As always, best of luck in the new year!

In Defense Of iShares MSCI Emerging Markets Minimum Volatility ETF

Summary I recently profiled several emerging market low-volatility ETFs and selected EEMV for my own personal portfolio. Last year, another Seeking Alpha author wrote a detailed analysis highlighting the drawbacks of EEMV. This piece considers those drawbacks in light of EEMV’s 3-year performance and also examines the role of the fund in one’s portfolio. Introduction In a previous article , we studied the performance of three low-volatility emerging market (EM) ETFs: 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 ). We found that all three low-volatility EM ETFs delivered lower volatility than the benchmark iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ) over the past two years, but with wildly disparate returns. EEMV did the best out of the three funds, with a 20.64% return, while EELV returned 8.87%. Also, both funds beat EEM (6.23%). On the other hand, HILO was by far the worst fund with a total return performance of -9.53%. I decided to select EEMV for my own portfolio as it had better sector diversification, greater allocation towards low P/E countries, and the lowest expense ratio out of all the ETFs. In April 2013, around one and a half years after the inception of EEMV, Seeking Alpha author Investment Therapist wrote a detailed analysis that was critical of EEMV for the following four reasons: The methodology of EEMV is constructed without a return focus. Historical volatility is not the best way to obtain low future volatility. EEMV is underdiversified and overconcentrated in low-volatility, high-dividend names, which may underperform in a bull market. The low volatility of EEMV will not protect the fund from a financial crisis. With another 1.5 years under its belt since the date of that article, this fund is now over three years old. This article seeks to address some of the criticisms raised by Investment Therapist in light of the EEMV’s three year performance, and also examines the role of the fund in one’s portfolio. While I disagree with some of his statements, this piece aims not to be combative, but is intended to both clarify my own thinking and to stimulate discussion with the broad readership of Seeking Alpha. 1. The methodology of EEMV is constructed without a return focus. Investment Therapist writes: Basically, the portfolio is being created with an emphasis on volatility and NOT return opportunities. It should go without saying that most rational investors are primarily focused on potential Rewards relative to Risk, and not solely focused on Risk (volatility). By focusing on volatility, the portfolio is created with no outlook on the future return opportunities of the stocks within the portfolio. Investment Therapist is basically saying that volatility has no relationship with future return. However, volatility is a validated factor for alpha. In an April 2012 article by Robeco Asset Management entitled “The volatility effect in emerging markets”, authors Blitz, Pang and Vliet found that from 1988 to 2010, EM stocks that showed lower volatility or lower beta outperformed those with higher volatility or higher beta on a risk-adjusted basis. After adjusting for differences in market beta, the “top-minus-bottom” 1-factor alpha spread between the highest and lowest quintiles of stocks ranked in terms of volatility was determined to be -8.8% per annum. Ranking stocks in terms of beta produced similar results that were less strong (1-factor alpha spread = -5.4%), but still statistically significant. Similar analysis conducted with size, value and momentum (re)confirmed that these premia also operated in emerging markets. Based on the 1-factor alphas, the authors found that the low-volatility premium was much larger than the size premium, comparable to the value premium, but smaller than the momentum premium. Low-volatility stocks also tend to be larger and more mature companies, which could possibly predispose them towards value rather than growth exposure. Was the low volatility premium simply due to an increased exposure to the value factor? To address this, the authors calculated 3-factor and 4-factor alphas for their sample. They found that the 3-factor alphas were very similar to the 1-factor alphas, indicating that exposures to size or value do not explain the higher returns of low-volatility or low-beta stocks in the study. Only the 4-factor alphas were slightly lower, indicating that low-volatility stocks may have indirectly benefited by also showing momentum characteristics (NB: riddle me that!). Therefore, it seems that selecting for low-volatility has been a robust factor for achieving higher risk-adjusted returns. 2. Historical volatility is not the best way to obtain low future volatility. In Robeco’s study of emerging market stocks, the authors stated that “Past risk is again strongly predictive for future risk”. However, Investment Therapist writes: If choosing stocks with low historical volatility and/or low correlations is such a great way of creating a “Minimum Volatility Portfolio,” then why are there over 10 Emerging Market mutual funds that have lower 1-year and Since Inception (of EEMV) volatility than EEMV? Focusing on historical volatility clearly doesn’t produce a portfolio with the lowest volatility. The funds with lower volatility than EEMV focus on the valuation of stocks (determining a stock’s intrinsic value), which EEMV does not since returns are not an input into the construction of the ETF portfolio. Investment Therapist is saying that funds (presumably mutual funds) with a focus on value managed to achieve lower volatility than EEMV over 1-year or since inception (1.5 years). As EEMV is now 3 years old, we can do a longer test of its realized volatility. Note that I shall be using EEM as a benchmark rather than mutual funds as I believe that is a fairer comparison. The graph below shows the 30-day volatility for EEMV and EEM over the past 3 years. EEMV 30-Day Rolling Volatility data by YCharts The results show that EEMV has consistently managed to obtain lower volatility than EEM over the past 3 years. Therefore, it seems that the fund does succeed at producing lower volatility compared to the benchmark. Just for interest, I also report the 2-year volatility and beta values for three EM low-volatility funds (EEMV, EELV and HILO), three EM value funds ( EVAL , PXH , TLTE ), and EEM. The 2-year return of the funds is also shown for comparison. Data are from InvestSpy . Volatility Beta Return EEMV 12.90% 0.81 3.90% EELV 13.30% 0.81 -2.00% HILO 15.30% 0.89 -15.90% Average 13.83% 0.84 -4.67% (NASDAQ: EVAL ) 25.00% 0.57 -5.20% (NYSEARCA: PXH ) 17.90% 1.06 -9.30% (NYSEARCA: TLTE ) 14.70% 0.82 -1.60% Average 19.20% 0.82 -5.37% EEM 16.90% 1.06 -1.40% Interestingly, we find that the three EM value funds actually had higher volatility than the benchmark EEM. Therefore, for passively-managed emerging markets ETFs at least, it seems that value stocks did not possess lower volatilities. 3. EEMV is underdiversified and overconcentrated in low-volatility, high-dividend names, which may underperform in a bull market. Investment Therapist writes: With correlations now coming down and higher yielding investments now approaching the status of “overcrowded trade,” I expect (my opinion) that the same high tracking error that came with the fund on the upside performance will also cause this fund to experience strong pains should a bull market in Emerging Markets form. Overall, once the strong performance over the fund’s very short tenure is examined deeper, it can be seen that the strong stylized bias towards the value-oriented, low-volatility names were a tail-wind to the fund. I do agree with Investment Therapist here. Low-volatility names tend to exist in more mature, stable industries that have a lower capacity for growth. In our previous article, we saw that EEMV was actually more pricey than EEM in terms of its valuation metrics (table reproduced below, data from Morningstar , value metrics are forward-looking). EEMV EEM Price/Earnings 15.69 12.76 Price/Book 1.86 1.49 Price/Sales 1.51 1.14 Price/Cash Flow 7.38 4.91 Dividend yield % 2.81 2.56 Projected Earnings Growth % 10.97 11.76 Historical Earnings Growth % 5.06 -1.68 Sales Growth % -15.60 -13.79 Cash-flow Growth % 6.36 7.85 Book-value Growth % -26.56 -21.57 Since EEMV’s inception, there have been at least two mini-bull markets where EEM climbed by 20% or more. Let’s see how EEMV and its “opposite fund”, the PowerShares S&P Emerging Markets High Beta Portfolio (NYSEARCA: EEHB ), performed over these two time periods. Jun 1st, 2012 to Jan 1st, 2013 EEM Total Return Price data by YCharts Feb 1st, 2014 to Sep 1st, 2014 EEM Total Return Price data by YCharts We can see that in both mini-bull runs, EEMV underperformed the benchmark EEM, while EEHB outperformed. Therefore, I agree with Investment Therapist’s assertion that EEMV would likely underperform EEM in a future bull market. But we should also consider this question: what was the purpose of the low-volatility fund in the first place? No one should have expected such a fund to keep pace with a roaring bull. Instead, a low-volatility fund’s aim should be to reduce equity risk (to a certain extent), resulting in higher risk-adjusted returns. The following table shows the 20-month return, volatility, beta, and maximum drawdown of EEMV, EEHB and EEM (data from InvestSpy ). Volatility Beta Max draw. Return EEMV 13.7% 0.86 -15.90% 7.80% EEHB 25.0% 0.62 -29.90% -12.90% EEM 18.0% 1.16 -18.90% -5.60% We can see that the recent struggles of EM markets has caused EEHB to significantly underperform. EEHB had higher volatility and also greater maximum drawdown over the past 20 months compared to EEMV or EEM. (Note that the beta values are with respect to S&P500 and therefore may n to be applicable). So am I saying to go for high volatility/beta in bull markets, and low volatility/beta in bear markets? Hardly. The first reason is that no one can reliably predict when the next bull or bear market will arrive. The second reason is that if you were to pick a factor to tilt towards in a bull market, wouldn’t you rather choose momentum [such as PowerShares DWA Emerging Market Momentum Portfolio (NYSEARCA: PIE )], which is an academically validated factor for outperformance, rather than high-volatility, an academically validated factor for underperformance? All in all, I don’t think that buying-and-holding EEMV is an inherently flawed decision. This is particularly true for the investor who wants some exposure to emerging markets, but are afraid that they can’t handle the higher volatility of emerging markets. However, for investors with a higher risk tolerance I would recommend also buying PIE and PXH to take advantage of momentum and value premia as well, and for better diversification over the entire market cycle (one could also achieve better diversification by holding EEM). 4. The low volatility of EEMV will not protect the fund from a financial crisis. Investment Therapist writes: Bonds will behave much differently than stocks, even during a financial crisis. A portfolio of stocks, however, wavered during the most recent financial crisis and the lack of “diversification” was made evident. There is no fundamental research proving that this type of optimization would work at the Stock Selection level since a portfolio of stocks behave more similarly than two unique strategies like Bonds and Stocks. I do completely agree with Investment Therapist on this. Low volatility stocks are still stocks, and will move (more or less) as other stocks do. Therefore, investors in EEMV should not expect the fund to hold up during a recession (like a bond would). But again, an investor should be asking the same question: what was the purpose of the low-volatility fund in the first place? What a low-volatility fund will do is to perform better than a neutral or a high-volatility fund during a correction or a bear market. Indeed, (backtested) data shows that MSCI EM Minimum Volatility Index, the underlying index for EEMV, dropped “only” -41.97% in 2008, while the MSCI EM index dropped -53.18%. In more recent and actual data, EEMV held up better than EEM in the September swoon that hit emerging markets this year (strangely, so did EEHB). EEM Total Return Price data by YCharts Conclusion Investment Therapist’s article contained some criticisms on EEMV that, while technically correct, should not unduly worry the investor who recognizes the role and limitations of a low-volatility fund in their portfolio. Yes, EEMV will likely underperform EEM in a bull market and will also likely underperform bonds during a bear market. However, what EEMV will deliver is lower volatility compared to EEM, which is great from a psychological point of view, as well as higher risk-adjusted returns or “alpha” (as long as the low-volatility premium persists, which I will assume to be the case until evidence points otherwise). However, one cautionary note that I will echo Investment Therapist on is that low-volatility stocks are becoming more expensive. Therefore, I recommend that investors with higher risk tolerances should also consider holding EM value funds such as PXH or EM momentum funds such as PIE to harvest other alternative sources of alpha.

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.