Beating the market with less volatility is the sales pitch of money managers everywhere. The idea is appealing: Who wouldn't want to outperform the

S&P 500

with less stress?

Investing in the U.K. through the

iShares MSCI United Kingdom Fund

(EWU) - Get Report

might fit the bill -- and by the way, it has a higher yield than the S&P 500.

The iShares U.K. has a different composition in terms of sector weighting than most U.S. benchmarks. Energy is the largest sector at 19.1%, banks make up 18.6%, the fund has 9.1% in drug stocks, and 7.1% is allocated to materials.

iShares U.K. gets a lot of its 2.9% dividend yield (compared with 2.1% for the S&P 500) from banks such as

HSBC

(HBC)

, Royal Bank of Scotland and

Barclays Bank

(BCS) - Get Report

, which yield 4.9%, 3.28% and 5.5%, respectively.

If the Pitch Fits...
iShares U.K. offers less volatility and S&P-beating returns

Click here for larger image.

Source: BigCharts.com

Looking forward, iShares U.K.'s heavy weight to oil could make or break the performance. But the energy stocks that dominate the fund are

BP

(BP) - Get Report

, at 9.04%, and

Royal Dutch Shell

(RDS.A)

, at 8.59%, which are relatively low-beta names.

Adding further low-beta stability to the fund are top-10 health care names such as

AstraZeneca

(AZN) - Get Report

and

GlaxoSmithKline

(GSK) - Get Report

, which have generally held up better than most American big-pharma stocks.

If you are a believer in the energy and commodity themes, as I am, iShares U.K. offers a nice growth kicker in its materials exposure. Some of the big Australian and South African diversified mining companies such as

BHP Billiton

(BHP) - Get Report

,

Rio Tinto

(RTP) - Get Report

and

Anglo American

(AAUK)

have dual listings in the U.K. and are included in iShares U.K.

One last point about the fund is the beta, which, according to the iShares Web site, is 0.77, compared with, of course, 1.00 for the S&P 500.

While this all sounds appealing, the U.K. economy is much different from the U.S. economy. It's important to understand what these differences are.

The country is obviously much older than the U.S. I believe that because the economy is much more mature, the booms and busts of the U.K. economic cycle are much shallower than what we are used to. The consequence of this is slower GDP growth. In 2005, the U.K.'s GDP grew at 1.7%, according to government statistics, and it is forecast to grow at 2.2% in 2006. This compares with 3.5% in 2005 and a forecast of another 3.5% in 2006 for the U.S. (though frankly, I'll be shocked if the U.S. reaches that level this year).

The yield curve has been inverted, in different magnitudes, for quite a while now in the U.K. It seems like the implications of that condition are different there than here, because the inversion has not caused a recession. The Bank of England currently has rates at 4.5%, while 10-year bonds yield 4.15% and five-year bonds yield 4.2% (both as of Feb. 9).

Comparing Inversions
U.K. issues vs. U.S. Treasuries

Source: YieldCurve.com

The interest rate policy, at 4.5%, might seem tight, but the consumer price index in the U.K. has been running in line with the Bank of England's targeted inflation rate of 2.0%.

As charted above, iShares U.K. has outperformed the S&P 500 over the last two years, 22% to 10%. It has had that outperformance as the British pound has depreciated by roughly 5%. In pound terms, the MSCI U.K. Index is up closer to 30% in the last two years. iShares U.K. could get an added lift if the pound gets stronger against the greenback, which I believe will be the case.

I turn to the U.K. for client accounts in order to reduce volatility and increase dividend yield. iShares U.K. meets both of these objectives, and it could have a place in your portfolio if you're seeking an ETF with those qualities.

At the time of publication, Nusbaum was long BP, Barclays Bank and GlaxoSmithKline for client holdings, although positions may change at any time.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, Ariz., and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback;

click here

to send him an email.