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Don’t Forget This Low Volatility ETF


Exchange trade funds offering exposure to stocks with low volatility characteristics have proven popular with investors. Despite recent outflows from these funds, the The PowerShares S&P 500 Low Volatility Portfolio (SPLV) has over $3.8 billion in assets under management while the iShares MSCI USA Minimum Volatility ETF (USMV) has over $2 billion.

The still unheralded VelocityShares Equal Risk Weighted Large Cap ETF (ERW) is one of the challengers to the low volatility dominance of SPLV and USMV. Upstart ERW’s low volatility approach may be worth considering

ERW tries to reflect the performance of the VelocityShares Equal Risk Weighted Large Cap Index, which includes components taken from the S&P 500 but weights stocks equally so that each holding is expected to contribute the same level of risk to the index. Bottom line: ERW is equal-weight on volatility. [VelocityShares Puts its own Spin on Low Volatility ETFs]

“Not all alternative weighting mechanisms are created equal, and often a ‘low volatility’ approach creates concentrated stock and sector risk,” according to VelocityShares research. The firm notes that a typical low volatility approach does overweight low risk stocks, but has “erratic total risk weights” whereas the equal risk weight approach “Overweights low risk stocks and eliminates risk concentrations.”

ERW holds 501 stocks with top holdings hailing from the health care sector, a group that includes Life Technologies (LIFE) at 10.8% and Intuitive Surgical (ISRG) at 7.7%. ERW, which debuted in late July, has an annual expense ratio of 0.65%. [Low Volatility ETFs Remain Popular With Investors]

ERW’s underlying index, the VelocityShares Equal Risk Weighted Large Cap Index, “uses an optimization process to assign equal risk weighting” to each S&P 500 member. Historical and implied volatilities are combined. In terms of dollar weights by sector, ERW is underweight energy, financial services, technology, telecom and industrials relative to the S&P 500. The ETF is overweight materials, consumer discretionary, staples, health care and utilities.

There is no doubt that investors have embraced “low vol” ETFs, particularly in risk-off environments. ERW’s more advanced approach gives investors one more risk-mitigating alternative to consider when evaluating volatility reduction strategies.

ETF Trends editorial team contributed to this post.


ETF Trends editorial team contributed to this post.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.