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Two New Active ETFs to Manage Volatility in Developed Markets

editor@etftrends.com (ETF Trends)

First Trust Advisors expanded its line of actively managed exchange traded fund strategies with two new options that seeks to generate alpha while mitigating expected volatility in both domestic and developed international markets.

The new actively managed First Trust Horizon Managed Volatility Domestic ETF (HUSV) and the First Trust Horizon Managed Volatility Developed International ETF (HDMV) began trading Thursday, August 25. HUSV has a 0.70% expense ratio and HDMV has a 0.80% expense ratio.

The two funds will try to provide capital appreciation while diminishing volatility using a proprietary quantitative and rules-based investment process. Securities selected will include those believed to exhibit low future expected volatility.

The portfolio managers will try to capitalize on the so-called low-volatility anomaly.

“Economic theory would have you believe that those who take on higher risk should be compensated by the potential for higher expected return. The conventional wisdom is that it pays to take chances. However, counterintuitively, history has shown that portfolios of low-beta and low-volatility stocks have produced higher risk-adjusted returns than portfolios of high-beta and high-volatility stocks, in most major markets studied. This phenomenon is known as the low-volatility anomaly,” according to First Trust.

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Horizon Investments will act as the fund’s sub-advisor. HUSV and HDMV will be managed by Horizon Portfolio Managers, including Michael Dickson, Scott Ladner and Steven Clark. Horizon is crafting the strategy around the idea that those in the retirement phase are looking for more conservative plays.

“While they want equity exposure, they naturally are looking for lower risk and lower volatility products,” Robbie Cannon, President and Chief Executive Officer at Horizon, said in a press release. “The ETFs were designed with just that in mind, given our conviction that an actively managed portfolio of low volatility stocks can produce better risk-adjusted returns than portfolios of high volatility stocks, which translates to investors as a smoother ride in equity markets.”

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Specifically, HUSV will start with a universe of large-cap U.S. equities while HDMV starts with a universe of large- and mid-cap developed market securities. The portfolio managers will then use historical price returns over multiple time frames to determine market volatility cycles and score securities based on the volatility. HUSV will then track 50 to 70 companies with the lowest forecasted volatility while HDMV takes 100 to 200 stocks with the lowest volatility score. Lastly, securities are weighted based on forecasted volatility scores with larger weights given to those that exhibit lower future expected volatility.

HUSV has a 21.9% tilt toward consumer staples, 21.6% industrials, 15.9% utilities, 13.7% financials, 12.7% health care, 7.6% consumer discretionary, 4.7% telecom, 1.1% energy and 0.9% tech. Top holdings include Johnson & Johnson (JNJ) 4.3%, Waste Management (WM) 3.6% and Lockheed Martin Corp (LMT) 3.4%.

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HDMV includes a hefty 57.7% financial tilt, along with 18.3% telecom, 6.6% industrials, 5.4% consumer staples, 4.1% utilities, 3.9% health care, 1.8% consumer discretionary, 1.2% materials and 1.0% tech. Top components include a large 30.9% in Bank Hapoalim B.M., 16.6% Beze The Israel Telecommunication Corp. and 15.9% Bank Leumi Le-Israel B.M. MAN SE.

For more information on new fund products, visit our new ETFs category.