VelocityShares, the Darien, Conn.-based designer of exchange-traded products that's known so far for its family of volatility-focused ETNs, tomorrow is launching a risk-weighted ETF focused on large-cap U.S. equities.
The VelocityShares Equal Risk Weighted Large Cap Fund will have its primary listing on Nasdaq and will trade under the symbol “ERW” with an annual expense ratio of 0.65 percent, or $65 for each $10,000 invested, according to a regulatory filing the company made earlier this year.
The index methodology is part of a broader trend in the world of indexes and ETFs involving security-selection screens that isolate various factors to tilt portfolio holdings to conform to some investment strategy. In sum, all the smart beta methodologies are beginning to make inroads and challenging first-generation capitalization-weighted indexes, as measured by increased asset gathering.
The target weighting of each stock in ERW 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; second, 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.
VelocityShares has $802 million in assets under management in 21 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. It brought two of those ETFs to market in June:the VelocityShares Tail Risk Hedged Large Cap ETF (TRSK), and the VelocityShares Volatility Hedged Large Cap ETF (SPXH).
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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