Time to buy global low volatility ETFs?

 

Global markets may waver this week thanks to a host of issues. First, a bout of tension is flaring up in the Middle East as the OPEC top brass Saudi Arabia and other Arab states cut their diplomatic ties with Qatar accusing the latter of backing terrorism. Oil prices nosedived in apprehension that this strife may dismantle the effectiveness of the ongoing OPEC output cut deal.

Secondly, the fired Federal Bureau of Investigation Director James Comey is slated to testify in front of the Senate Intelligence Committee on Thursday.He was dismissed by Trump last month due to his inability to handle the investigation into Hillary Clinton’s emails properly.

Moreover, a snap election in the United Kingdom will be held on June 8. British Prime Minister Theresa May made a surprise announcement in mid-April to hold a snap general election this week, three years ahead of the 2020 schedule. Interference from opposition to pursue Brexit negotiations was behind this decision. With this election, May seeks to increase her party’s majority in the parliament. CurrencyShares British Pound Sterling ETF FXB and iShares MSCI United Kingdom EWU have thus gone into a high-alert mode and been trading with high volumes ahead of the polls.

Plus, on the same day, the ECB is scheduled to hold a policy meeting. Though investors are largely sure about the continuation of the ECB’s policy stance, some amount of uncertainty ahead of such an important meeting is understandable. If these were not enough, the Fed rate hike possibility in the mid-June meeting is quite ripe now. This can cause a short-term upheaval in the market.

Market Reaction

Sensing the looming hike, the market has already started to position itself. Yields on three-month and six-month U.S. Treasury bonds went up 1 bps and 2 bps on June 6, 2017 from the day before despite geopolitical concerns. However, yield on benchmark U.S. Treasury dropped 4 bps from the previous day to 2.14% reacting to host of worries.

Several corners of the market have witnessed modest sell-offs on June 6, 2017 as investors were worried about going over the ledge, opting instead for safe havens. iShares 20+ Year Treasury Bond TLT was up over 0.5% on June 6 while key U.S. ETFs, SPY, DIA and QQQ were in the red. All-world ETF iShares MSCI ACWI ACWI was off about 0.3% on June 6.

ETFs to Play

Against such a baffling backdrop, seeking refuges in low volatility products rather than sticking to highly risky options can help investors to endure the geopolitical storm. These global low-volatility products could be intriguing choices for those who want to stay invested in equities, but like the idea of focusing on minimum volatility. Low volatility ETFs generally tend to offer positive risk-adjusted gains, though not enormous.

iShares MSCI EAFE Minimum Volatility ETF EFAV

EFAV looks to replicate the performance of international equity securities that have lower absolute volatility. No single stock makes up more than 1.49% of the portfolio. Country wise, the fund appears more focused on Japan (28.1%), United Kingdom (15.3%) and Switzerland (13.3%) equities. It currently carries a Zacks ETF Rank #2 (Buy) with a Low risk outlook. The fund charges 20 bps in fees.

iShares MSCI Europe Minimum Volatility ETF EUMV

It tracks the MSCI Europe Minimum Volatility Index giving exposure to 154 European stocks having lower volatility characteristics relative to the broader European developed equity markets. The product charges 25 bps a year.

Like many other funds in the space, the ETF provides higher diversification benefits with none of the securities making up for more than 1.54% of assets. In term of country exposure, United Kingdom takes the largest share at 27%, followed by Switzerland (18%), France (11.5%) and Germany (10.5%). The fund has a Zacks ETF Rank #2 (Buy).

The Legg Mason Low Volatility High Dividend ETF LVHD

This ETF provides stable income through investment in stocks of profitable U.S. companies with relatively high dividend yields, lower price and earnings volatility. Utilities, consumer staples, industrials and consumer discretionary make up the top four sectors with a double-digit allocation each. It charges 30 bps in annual fees, yields about 2.8% annually and has a Zacks ETF Rank of 3 (Hold).

SPDR SSGA US Small Cap Low Volatility Index ETF SMLV

Small-caps lagged in the U.S. in recent times, opening up a better buying opportunity. Plus, The World Bank expects the U.S. economy to expand 2.1% this year, up from 1.6% in 2016. This makes the case for investing in SMLV stronger as the pint-sized stocks perform better in a trending economy. It charges 12 bps in annual fees.

The Cambria Core Equity ETF CCOR

The new actively managed fund uses a host of strategies to offer capital appreciation while lowering risk quotient across market conditions. “The fund invests in high-quality companies across all industries and sectors, that have prospects for long-term total returns  as  a  result  of  their  ability  to  grow  earnings  and  their  willingness  to  increase dividends over time”, as per the factsheet. The fund’s expense ratio is 1.05%.

ISHARS-20+YTB (TLT): ETF Research Reports

CRYSHS-BRI PD S (FXB): ETF Research Reports

ISHRS-MSCI ACWI (ACWI): ETF Research Reports

ISHARS-MS EU MV (EUMV): ETF Research Reports

LM-LO VOL HIDIV (LVHD): ETF Research Reports

SPDR-R2000 LV (SMLV): ETF Research Reports

ISHARS-MS EMVIF (EFAV): ETF Research Reports

ISHARS-UTD KING (EWU): ETF Research Reports

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