These Smart-Beta ETFs Survive Market Volatility

The ‘smart beta’ craze has embraced the ETF world. With plain vanilla ETFs or market-cap oriented ETFs and specific sector ETFs losing their charm, issuers are coming up with innovative and smart-beta approaches every now and then.

The love for smart beta products can be felt from Nasdaq OMX Group Inc.’s (NDAQ) recent buyout deal with private investment advisory firm – Dorsey, Wright & Associates (DWA). The latter is known for smart-beta models. In fact, in a bid to be the top smart beta index provider, Nasdaq probably chalked out this purchase plan.

Morningstar estimates that 59% of new investor money in ETFs has so far been absorbed by smart-beta ETFs since Jan 2013. Per Bloomberg, in 2014, around one-fifth of the ETF industry was occupied by smart-beta products. By now, investors are quite familiar with what the smart-beta concept actually is. As the name suggests, this approach calls for a strategic procedure other than a plain vanilla market-cap oriented method of portfolio construction.

Below we have highlighted three ‘Smart Beta’ options that outperformed the broader U.S. market ETF SPDR S&P 500 (SPY) which added just 1.32% so far this year (as of March 30, 2015) and 0.3% in the last ten trading sessions. These ETFs could be the ones to watch in the days to come too.

iShares MSCI EAFE Minimum Volatility ETF (EFAV)

With volatility rising from Fed-related speculations, global growth worries and geo-political concerns emanating related to the Saudi attack on Yemen, low volatility ETFs are gaining traction lately. EFAV looks to replicate the performance of international equity securities that have lower absolute volatility. This equal-weighted ETF invests about $2.06 billion in 198 holdings.

No single stock makes up more than 2.14% 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. The fund charges about 20 bps in fees. EFAV was up 8.6% so far this year (as of March 30, 2015) and about 3% in the last ten trading sessions. The fund currently carries a Zacks ETF Rank #3 (Hold) with a Low risk outlook (read: 3 Low-Risk ETFs Beating SPY This Year).

International Hedged Dividend Growth Fund (IHDG)

Global easing has bolstered the appeal for dividend ETFs since the start of the year. The U.S. economy is presently sporting a low-rate environment. The ECB has launched a QE program with negative interest rates in place. Japan has long been pursuing the QE program with zero interest rates and several other economies, be it in Europe or Asia, have jumped on the bandwagon of policy easing (read: 5 Dividend ETFs to Buy for Income in 2015).

In such a scenario, it can be an excellent idea to focus on dividends. Among dividend-oriented ETFs, investing in companies that have a strong history of growing dividends seems a better idea than those which hand out the largest payouts or offer largest yields.
IHDG follows the WisdomTree International Hedged Dividend Growth Index. This benchmark consists of about 300 companies that have a market cap of at least $1 billion. This $205 million-ETF is heavy on the United Kingdom (18.97%), Switzerland (12.50%) and Germany (12.37%).

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