Given the high level of volatility in emerging markets, it isn’t surprising that the EM indexes have been underperforming. The S&P Emerging Plus LargeMidCap dropped nearly 10% for the year that ended April 1.
However, Fei Mei Chan, director, core product management at S&P Dow Jones Indices, recently noted that this is nothing new, as emerging markets have underperformed broader global benchmarks for years. In fact, the correlation between the S&P 500 and the S&P Emerging Plus LargeMidCap over the past 25 years was 0.74, with the performance of emerging markets during this period tending to be 49% more volatile than that of the S&P 500.
Chan added that low volatility strategies are designed for times like these — and that’s certainly true, if the performance of the Invesco S&P Emerging Markets Low Volatility ETF (EELV) is anything to go by. While the S&P Emerging Plus LargeMidCap has dropped 9.62% year-to-date as of April 1, EELV rose 15.76% during the same period.
According to S&P, strategies explicitly designed to root out a certain pattern of returns relative to the broader market tend to be more reliable. And since they tend to get less whipsawed when markets fall, low-volatility strategies typically outperform over the long term. The S&P BMI Emerging Markets Low Volatility Index returned 8.6% in the past 25 years, compared with 6.8% for its underlying index.
ETF Trends’ head of research Todd Rosenbluth explained that the Invesco fund offers EM exposure without the same level of risk while providing downside protection.
“EELV is constructed differently than many emerging markets ETFs, with its focus on lower-risk stocks,” Rosenbluth said. “Rather than being heavily weighted to China, the ETF recently had high exposure to Taiwan, Thailand, and Saudi Arabia.”
The fund seeks to track the investment results of the S&P BMI Emerging Markets Low Volatility Index. S&P Dow Jones Indices LLC compiles, maintains, and calculates the underlying index, which is designed to measure the performance of 200 of the least volatile stocks of the S&P Emerging Plus LargeMidCap Index.
“Emerging market investments are known to exhibit a fair amount of volatility, which wards some risk-averse investors away from their potential gains,” says the fund’s analyst report on ETF Database. “EELV seeks to eliminate that gap by offering a methodology that chooses low volatility emerging market stocks.”
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