Should You Turn To Low-Volatility ETFs During Market Uncertainty? Part 2

Includes: ACWV, EFAV, IDLV
by: Invest Chief

In Part 1 of this series, I introduced investors to the idea of using low volatility ETFs to help curb portfolio risk in times of market uncertainty. While there are many volatility ETFs to choose from, not all are equal. Some volatility ETFs use derivatives such as options or even use futures to trade the Volatility Index, or VIX. While these types of investments may have their place for investors that have a higher risk tolerance and understanding of derivatives, the average investor saving for retirement really should stay away from these offerings.

The ETFs that I have chosen for this series invest in low volatility, large/giant cap stocks and the overall ETFs are well diversified resemble index funds and have a very reasonable cost. Long term investors are not necessarily interested in blowing the S&P 500 out of the water, but rather have a stable, steady portfolio that provides protection from downside risk. It is always important for investors who are investing for retirement to protect their life-savings and portfolios from factors such as high volatility.

Back in part 1, we examined two low volatility plays for US stocks. Both are extremely suitable for this current market, now that the VIX is on the rise. In this article, I will cover three more low volatility ETFs for international exposure. The three I will be covering are: PowerShares S&P International Developed Low Volatility (NYSEARCA:IDLV), iShares MSCI All Country World Mini Volatility (NYSEARCA:ACWV), and iShares MSCI EAFE Minimum Volatility (BATS:EFAV).

PowerShares S&P International LV

Cost and Yield: IDLV currently yields 2.60% and has an annual expense ratio of 0.25%.

Performance: This LV ETF is currently down 2.92% year to date, compared to its benchmark, MSCI EAFE, year to date return of -3.5%. While the ETF is down for the year, it is outperforming its benchmark due to the increase in volatility in world markets. One year trailing total return comes in at 9.71% gain for the international low volatility ETF, compared to benchmark return of 14.55% during same period.

Stock Capitalization: IDLV maintains a dominant portion of its portfolio in large caps, as expected, with 45.12% of portfolio there. Giant cap stocks take second with 31.36% exposure. Medium cap has a solid amount of exposure at 23.08%, and small caps even have a small place in the portfolio of 0.44%.

Sector Weights: Given that this is a low volatility ETF and remains committed to defensive sectors, managers of this ETF certainly have interesting positions. Looking at cyclical sectors, IDLV has more exposure in consumer cyclical (8.38% of portfolio, compared to benchmark's 6.53%) and real estate (9.48%, compared to 3.54%). Turning to sensitive sectors, IDLV outweighs its benchmark in industrial exposure (14.45%, compared to 6.64%). In the defensive names, IDLV has larger positions in consumer defensive and utilities, but the ETF's benchmark has a higher exposure to healthcare (IDLV's 5.03%, compared to benchmark's 6.11%).

World Regions: IDLV's make up in 26.83% North America (except US), 48.88% Europe, and 24.29% Greater Asia.

Overview: The IDLV has a good exposure of the international markets, with over 200 positions in its portfolio. Dividend yield is nice and expense ratio is a fair 0.25%. While I would say this ETF contains more risk than its US counterparts from part 1, due to its large positions in financials, industrials, and real estate, the concept remains the same. PowerShares S&P Intl LV ETF is a good play for investors looking for lower risk international equity exposure.

iShares All Country Mini Volatility

Cost and Yield: ACWV currently yields 2.56% and sports a slightly high expense ratio of 0.34%.

Performance: Trailing total returns have iShares All Country LV ETF at -3.75% year to date and up 7.94% over the past year. This compares to its benchmark, MSCI EAFE, year to date trailing total returns of -3.3% and up 14.55% over past year. As you can see, the recent volatility pick up is not fully reflected in this world stock ETF, as some countries are only just now experiencing high volatility figures.

Stock Capitalization: ACWV has most of its portfolio in large cap stocks, 44.1% of total portfolio. Additionally, the world stock ETF has 37.18% of its portfolio in giant cap stocks and 18.72% in medium cap stocks.

Sector Weights: Turning to cyclical sectors, ACWV only outweighs its benchmark in real estate (3.19% compared to 2.64%), however its positions are small. In sensitive sectors, ACWV has higher exposure to communication services (9.44% to 5.15% for benchmark) and industrials (10.96% to 10.6% for benchmark). In the defensive sectors, ACWV outweighs its benchmark in consumer defensive (17.07%, to 9.84%), healthcare (16.69% to 10.72%) and utilities (8.76% to 3.44%).

World Regions: ACWV is made up of 53.46% in Americas, 27.71% Greater Europe, and 18.83% in Greater Asia. However, the ETF is overwhelmingly in developed markets at 91.55% of its portfolio, compared to its emerging market exposure of only 8.45%.

Overview: If you are looking to get total world exposure with low volatility protection, there is no better ETF out there for the cost. While it is higher than some of its other peers in this article series, it stands alone with no real alternative. Overall, I like this investment over the long haul, as it provides you exposure all over the world with reasonable risk.


Cost and Yield: iShares EAFE ETF has a current yield of 2.61% and an expense ratio of 0.20%.

Performance: EFAV shows total trailing returns for year to date at -2.39% and up 10.3% for the past year. This compares to its benchmark, MSCI EAFE, with its year to date returns of -3.03% and up 14.55% in past year. As you can see, the ETF is outperforming its benchmark this year, finally, as volatility becomes a factor for investors to consider.

Stock Capitalization: EFAV's large cap positioning is just barely larger than its exposure to giant cap stocks, 43.69% and 43.04%, respectively. The remainder of the investment's portfolio is in medium cap stocks at 13.27%.

Sector Weights: EFAV has larger positions than its benchmark in cyclical sectors, consumer cyclical (9.3%, compared to 6.53% for benchmark) and real estate (6.51%, compared to 3.54%). Turning to sensitive sectors, EFAV has a higher portfolio weighting in communication services (11.93%, compared to 7.78%) and industrials (10.53%, compared to 6.64%). EFAV has a higher weighting in defensive names than its benchmark: consumer defensive (16.93%, to 4.27%), healthcare (16.04%, to 6.11%), and utilities (7.99% to 6.3%).

World Regions: EFAV is made up of 10.02% Americas, 53.47% Greater Europe, and 36.51% Greater Asia. This ETF has even greater exposure to the developed markets than ACWV, but inline with IDLV's developed exposure.

Overview: EFAV is a more conservative version of IDLV, due to its exposure into larger companies. EFAV also has a higher exposure to Asia and Europe, whereas IDLV has more exposure to the Americas. However, EFAV and IDLV are mostly the same in terms of yield and cost, therefore you must decide your exposure limits and stock capitalization requirements.

After reviewing part 1 and reading part 2, readers should have an idea of their conservative options for low volatility ETFs in US stocks and international stocks. These two equity areas are usually the first to be addressed when building a long-term portfolio. The ETFs we have discussed thus far, are built on a basic premise: low cost, well diversified, conservative, and well performing during periods of higher volatility. These are factors that retirement investors rely on and must keep in mind to protect their portfolios from the uncertainty. Tune in for part 3 of this series, where I will analyze emerging markets, as well as small and medium cap low volatility ETFs. Again, they feature similar make up as the ETFs you have seen so far: low volatility, low cost, well diversified, and good performance. However, while the ETFs in part 1 and 2 could qualify to be "core" portfolio holdings, ETFs from the next article will feature a little higher risk and require to be smaller positions in a portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.