Defensive Exposure to Stocks Abroad
This low-volatility ETF should give international-stock investors a smoother ride and better downside protection.
Currency fluctuations tend to make foreign stocks more volatile than their U.S. counterparts. Currency hedging is a potential solution, but it can increase transaction costs and reduce tax efficiency. As an alternative, investors might consider a defensive international-equity strategy, like iShares Edge MSCI Minimum Volatility EAFE (EFAV).
This exchange-traded fund tracks an index that attempts to create the least-volatile portfolio possible with large- and mid-cap stocks listed in developed markets in Europe, Australia, and Asia, under a set of constraints. These include limiting sector and country tilts relative to the MSCI EAFE Index, which improve diversification. The fund doesn't just target the least-volatile stocks. It takes into account each stock's exposure to common risk factors and the covariances among them to better estimate how the holdings will contribute to the portfolio's overall volatility. This may be a suitable core holding for conservative stock investors.
Alex Bryan has a position in the following securities mentioned above: EFAV. Find out about Morningstar’s editorial policies.