The low volatility factor is all the rage these days and rightfully so, but investors should remember that the perks of that factor are not confined to U.S stocks. Investors can move beyond domestic equities in “low vol” fashion with the iShares Edge MSCI Min Vol EAFE ETF (EFAV ).
EFAV “seeks to track the investment results of an index composed of developed market equities that, in the aggregate, have lower volatility characteristics relative to the broader developed equity markets, excluding the U.S. and Canada,” according to iShares.
Low volatility strategies, such as EFAV, are designed to perform less poorly when markets swoon, not capture all of a bull market’s upside. However, there are times when these funds can outperform their traditional rivals. Year-to-date, EFAV is beating the cap-weighted MSCI EAFE Index by 40 basis points while being 270 basis points less volatile.
“This fund’s big appeal is its ability to maintain exposure to stocks while taking less risk than the market,” said Morningstar in a recent note. “It will likely lag the MSCI EAFE Index during strong bull markets but hold up better when the market declines. This should outweigh the gains that it sacrifices during market rallies and lead to better risk-adjusted performance over the long haul.”
Evaluating EFAV More Closely
Historical data indicate that the minimum volatility factor is persistent in markets outside the U.S., too, providing investors with a potentially attractive avenue for increasing international allocations.
The low or minimum volatility strategy targets stocks that have lower expected risk or less idiosyncratic risks. Specifically, the strategy targets equities that exhibit lower beta, a measure of volatility or systematic risk of a security to that of the overall market. Consequently, minimum volatility portfolios are constructed with stocks that exhibit lower market risk or beta.
“Minimum volatility strategies can be an effective way to maintain exposure to stocks while mitigating risk,” said Morningstar. “Cutting back on risk could lead to lower rates of return than a cap-weighted index. But over long investment horizons, funds like this one have outperformed their market-cap-weighted counterparts on a risk-adjusted basis, indicating that the reduction in risk outweighs the impact of potentially lower returns.”
Morningstar has a Silver rating on EFAV.
This article originally appeared on ETFTrends.com.