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Not All Low-Volatility ETFs Are Created Equal

Daniel Sotiroff

Dan Sotiroff: Low-volatility strategies have been among the more recent additions to strategic-beta lineups over the past few years. These funds attempt to cut back on risk and can be solid long-term investments. But differences in processes make certain strategies more appealing than others.

Invesco S&P International Developed Low Volatility ETF is one low-volatility option in the foreign large-blend category. It holds the 200 least volatile stocks from the S&P Developed ex-U.S. Broad Market Index and weights them by the inverse of their volatility. It cuts back on risk, but it does not control its country or sector weights, so it can aggressively tilt toward certain segments of the market.

Another option is iShares Edge MSCI Min Vol EAFE ETF. This fund uses an optimizer to select and weight stocks from the MSCI EAFE Index and attempts to construct the least volatile portfolio possible. It looks for stocks with low volatility, but also considers each stock's correlation with others in the portfolio. This strategy also controls its sector and country weights, so it won't have the strong biases of the Invesco fund.

The combination of better country and sector diversification and a more integrated approach to selecting and weighting stocks make iShares Edge MSCI Min Vol EAFE ETF the better choice. It currently has an analyst rating of Silver.