VelocityShares, the exchange-traded product company that’s broadening its presence away from volatility-focused ETNs and toward ETFs, filed paperwork to market a risk-weighted version of the S'P 500 Index that seeks to assign each of the components an equal weighting from a risk perspective.
The target weighting of each stock in the VelocityShares Equal Risk Weighted Large Cap ETF will be determined using a proprietary risk-weighting methodology that measures a stock’s risk exposure and then weights each stock so that each is expected to contribute the same level of risk to the portfolio. The index will be rebalanced quarterly, the prospectus said.
The risk of each holding is based on a combination of two factors:first, historic market price movements/co-movements; and secondly, on implied market price volatility and each stock’s sensitivity to market price variation. Historic volatility is based on actual market price changes over a specified period of time, while implied volatility uses option data to calibrate a perceived level of expected price variation.
The company noted that the “risk contribution” of a constituent stock is defined as the sensitivity of the volatility of all the index constituents collectively to a change in the risk weighting of an individual constituent, the prospectus said. The proposed fund’s index is sponsored by VelocityShares Index ' Calculation Services, a unit of VelocityShares LLC.
VelocityShare has $956 million in assets under management in 18 different ETNs, with almost half of those assets in the VelocityShares Daily Inverse VIX Short Term ETN (XIV), according to data compiled by IndexUniverse. More recently, the company signaled it aims to expand into offering ETFs, as a regulatory filing in September putting five funds into registration made clear.
The prospectus didn’t specify an annual expense ratio for the company’s latest proposed equal- weight equity ETF, but said the ETF would trade under the ticker “ERW,” and would have its primary listing on the Nasdaq stock exchange.
VelocityShares is making use of the “exemptive relief” granted to Oklahoma-based Exchange Traded Concepts, a firm that markets the right it has received from the Securities and Exchange Commission to market ETFs.
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