Is it the Right Time to Buy Global Low-Volatility ETFs?

Sweta Jaiswal, FRM

The coronavirus outbreak is showing no signs of dying down. In fact, the number of new cases being reported from outside mainland China has started to increase. South Korea and Japan have confirmed a spike in the number of confirmed coronavirus cases. Globally, the Covid-19 has claimed 2,247 lives along with 76,790 confirmed cases (read: Coronavirus Puts These Country ETFs on High Alert).

The impact of the coronavirus can already be seen on China’s economy. The country, which happens to be the largest auto market, has witnessed a 92% decline in car sales during the first two weeks of February (per data from China Passenger Car Association). The virus outbreak is largely disrupting the global supply-chain patterns. Companies are struggling to procure some important parts from China due to the persistent shutdown in the nation’s manufacturing facilities.

A special briefing published by the global business research firm Dun & Bradstreet noted that the coronavirus outbreak could impact more than 5 million businesses globally. The data also states that about half (49%) of the companies, with subsidiaries operating in coronavirus-impacted regions in China, have headquarters in Hong Kong, whereas 19% belong to the United States, 12% to Japan and 5% to Germany. Hence, analysts at Oxford Economics project that the coronavirus outbreak globally can hurt GDP by 1.3% or $1.1 trillion in lost output, if it turns into a pandemic (read: ETF Areas That Can Stay Strong Amid Covid-19 Outbreak).

Per Moody’s Analytics and Barclays, the outbreak will dent global GDP by 0.3% in 2020. According to the latest reports, Japan’s economy shrunk 1.6% in fourth-quarter 2019 for an annualized decline of 6.3%, triggering fears of a recession in the days to come. The third-largest global economy has been pushed to the brink of a slump by the virus eruption in China.

Meanwhile, the coronavirus outbreak is being held responsible for the drop in manufacturing activity in France to a seven-month low in February. Moreover, Apple Inc. recently warned investors of the impact of the deadly coronavirus on its business and the company has therefore trimmed its sales expectations for the quarter (read: Coronavirus to Hurt Apple Earnings: Time to Buy These ETFs?).

ETFs to Play

Against such a backdrop, seeking refuge in low-volatility products seems judicious. 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 Edge MSCI Min Vol Global ETF ACWV

The United States (52.2%) is the top holding of the fund, followed by Japan (11.2), Switzerland (6%) and Canada (4.7%). Financials, Consumer Staples, Information Technology and Communication get a double-digit weight in the fund. The fund charges 20 bps in fees (read: Global Low-Volatility ETFs for Turbulent Times ).

iShares Edge MSCI Min Vol EAFE ETF EFAV

EFAV looks to replicate the performance of international equity securities that have lower absolute volatility. No single stock makes up more than 1.73% of the portfolio. Country-wise, the fund appears more focused on Japan (27.8%), Switzerland (14.2%) and United Kingdom (11.5%) equities. The fund charges 20 bps in fees (read: ETFs to Buy as Flare-up in Middle-East Tensions Spurs Volatility).

iShares Edge MSCI Min Vol Europe ETF EUMV

It tracks the MSCI Europe Minimum Volatility Index, giving exposure to 173 European stocks having low-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 1.68% of assets. In terms of country exposure, United Kingdom takes the largest share at 20.5%, followed by Switzerland (20.3%), France (12.9%) and Germany (11.7%).

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, Real Estate and Consumer Staples make up the top three sectors with a double-digit allocation each. It charges 27 bps in annual fees.