Lyxor, one of Europe’s largest ETF providers, has rolled out a new smart beta ETF, the Lyxor ETF EURO SMARTIX iSTOXX 50 Equal Risk (ERC). The ETF, which has been listed on the NYSE Euronext Paris, is indexed to the newly launched EURO iSTOXX 50 Equal Risk Index, a “sophisticated and innovative” strategy index from Zurich-headquartered STOXX.
Unlike traditional capitalisation-weighted indices, the EURO iSTOXX 50 Equal Risk Index applies an equal risk contribution (ERC) concept to the EURO STOXX 50 Index in order to spread the overall risk of the portfolio equally between the 50 index components. The index, which is based on the Modern Portfolio Theory, aims to achieve maximum risk diversification.
Commenting on the index, Hartmut Graf, chief executive officer of STOXX, said: “The new EURO iSTOXX 50 Equal Risk Index applies a sophisticated and innovative equal risk contribution concept to the leading blue-chip index for the eurozone.”
Graf added: “Equal risk contribution concepts combine elements of minimum variance and equal-weight strategies, and offer market participants an alternative to those regarding overall portfolio risk, risk budgeting and diversification.”
Francois Millet, Indexing Product Line Manager at Lyxor, said: “The ERC concept underlying the EURO iSTOXX 50 Equal Risk Index is backed-up by a number of academic publications, including Lyxor’s research. It provides the highest diversification of risk among all constituents of the original index while preserving its passive investment philosophy. The new index offers investors access to the efficient diversification of ERC, based on the flagship eurozone index.”
The EURO iSTOXX 50 Equal Risk Index has the same composition as the EURO STOXX 50 Index. However, the new concept applies an equal risk contribution strategy to the underlying index to allocate the risk contribution of the components equally.
In order to do so, at the monthly rebalancing a covariance matrix is calculated for the 50 components of the EURO STOXX 50 Index, using the single components’ closing prices over the trading days of the past year. This covariance matrix determines the components’ weights in the new EURO iSTOXX 50 Equal Risk Index in such a way, that all 50 stocks account for the same amount of risk in the overall index. Lyxor ETF EURO SMARTIX iSTOXX 50 Equal Risk (ERC) comes with a TER of 0.25%.
Also announced is the launch of another smart beta ETF, the Lyxor ETF MSCI World Risk Weighted (WLDR). This ETF tracks the MSCI World Risk Weighted index. This index tracks the same universe of securities as the MSCI World index; however, it aims to reduce risk in the portfolio by weighting each constituent stock according to risk, as measured by its volatility: the higher the risk of a constituent, the lower its weight. The aim of this is to reduce the overall volatility, and therefore risk, of the portfolio by limiting exposure to highly volatile stocks. The ETF is ideal for investors seeking to gain less volatile exposure to world equity markets. The Lyxor ETF MSCI World Risk Weighted (WLDR) is listed on the NYSE Euronext and comes with a TER of 0.45%.
For investors looking to invest in a similar London-listed product, they could consider the Ossiam ETF iSTOXX Europe Minimum Variance NR (EUMV). The aim of this ETF is to track the performance of 300 liquid stocks from the STOXX Europe 600 Index that are weighted to minimise the volatility of the total portfolio. In essence, the ETF attempts to deliver broadly the return of the STOXX Europe 600 Index but with lower overall risk. EUMV has a TER of 0.65%.