Weather Fed Rate Hike Fears With Global Low-Volatility ETFs

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Includes: AXJV, EFAV, ERW, EUMV
by: Zacks Funds

The Fed rate hike possibility probably never appeared as strong as it seems now. A better-than-expected job data recently along with strong manufacturing, construction spending and automobile sales confirmed the passage of winter blues and solid recovery in the U.S. economy. This has bolstered market sentiments that the Fed will normalize its interest rate policy this September or October.

The market has already started to position itself for a September lift-off timeline as bond yields took an upturn. Higher interest rates might derail the stock market rally as many investors will now throng to the fixed-income world in search of high current income.

Not only this, the ripples of the Fed tightening will spread into several corners of the investing universe. Most importantly, emerging economies which enjoyed prolonged easy money inflows will now be spots of vulnerability.

The International Monetary Fund's deputy managing director recently cautioned of "considerable" downside risks associated with the rippling effect of looming Fed rate hike, per Reuters. Several markets and asset classes will likely see disruptions once the decision is taken. To add to this, the rest of the developed world is yet to gain ground and the Greek debt concern seems a constant worry in the Euro zone.

In such a baffling backdrop, seeking refuge in low volatility products rather than sticking to highly risky options and enduring the Fed-infused storm can help investors. Since the effect of the Fed rate hike will not be limited to the U.S. market, investors can choose from across the global options.

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 (BATS:EFAV)

EFAV looks to replicate the performance of international equity securities that have lower absolute volatility. This equal-weighted ETF invests about $2.5 billion in 205 holdings. No single stock makes up more than 1.53% of the portfolio.

Country wise, the fund appears more focused on Japan and United Kingdom equities, with the duo having a little less than 50% allocation in the fund. EFAV charges about 20 bps in fees.

So far this year (as of June 8, 2015), the fund is up 8%. It currently carries a Zacks ETF Rank #3 (Hold) with a Low risk outlook.

iShares MSCI All Country Asia ex-Japan Minimum Volatility ETF (NYSEARCA:AXJV)

This fund, just a year old, follows the MSCI AC Asia ex-Japan Minimum Volatility (USD) Index and intends to offer better risk-adjusted returns to investors. The $5.4 million-product is heavy on nations like China, Taiwan and South Korea while sectors like financials, technology and industrials take up big chunks. AXJV has about 184 securities in total in its basket and charges 35 bps in fees for its service.

Individual holdings wise, the fund is quite diversified considering that no stock accounts for more than 1.95% of the basket. The top three holdings - Dr. Reddy's Laboratories, BOC Hong Kong Holdings and AIA Group combine to take up roughly 5.2% of assets. The Zacks Rank #3 ETF is up 7.9% in the year-to-date frame.

iShares MSCI Europe Minimum Volatility ETF (NYSEARCA:EUMV)

This fund has accumulated $9.8 million within one year of operation. It tracks the MSCI Europe Minimum Volatility Index giving exposure to 126 European stocks having lower volatility characteristics relative to the broader European developed equity markets. The product charges a bit cheaper fee of 25 bps a year while average daily volume is paltry at about 6,000 shares causing relatively high trading costs.

Like many other funds in the space, the ETF provides higher diversification benefits with none of the securities making up for more than 1.59% of assets. In term of country exposure, United Kingdom takes the largest share at 35.61%, followed by Switzerland (17.96%), Germany (10.3%) and France (10.2%). The fund is up 6.4% so far this year (as of June 8, 2015) and has a Zacks ETF Rank #2 (Buy).

VelocityShares Equal Risk Weighted Large Cap ETF (NASDAQ:ERW)

ERW tracks the VelocityShares Equal Risk Weighted Large Cap Index. This index uses a methodology to measure a stock's risk and then distributes the risk in each of its stock equally by weighing their risk exposure individually.

The index comprises most of the S&P 500 Index stocks, but individual exposure depends on their expected risk. The stocks with lower expected risk will account for a percentage of the index that is larger than in the S&P 500. This overlooked fund has managed to amass an asset base of nearly $2.6 million.

The fund charges a fee of 65 basis points annually and has returned 4.5% so far this year (as of June 8, 2015) while SPY has added about 1.4% during the same time frame. ERW has a Zacks ETF Rank #3.

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