Ossiam launches first low volatility FTSE 100 ETF

Jan 19th, 2012 | By | Category: Alternatives / Multi-Asset

Ossiam, an affiliate of Natixis Global Asset Management, has launched an ETF that tracks a low-volatility version of the FTSE 100 Index.

Ossiam launches first low volatility FTSE 100 ETF

Ossiam, an affiliate of Natixis Global Asset Management, has launched an ETF that tracks the FTSE 100 Minimum Variance TR Index, the first such low volatility FTSE 100 ETF.

The Ossiam FTSE 100 Minimum Variance ETF, the first such minimum volatility FTSE 100 ETF, gives investors exposure to a selection of the most liquid UK stocks, specifically optimised with the intention of minimising the risk of the total portfolio.

The fund tracks the FTSE 100 Minimum Variance TR Index, a rules-based benchmark developed by Ossiam in conjunction with FTSE, which weights constituents in accordance with the principles of mean-variance optimisation so as to broadly deliver the performance the FTSE 100 but with less volatility.

On average the volatility of the FTSE 100 Minimum Variance TR Index has proved to be at least 24% lower than the popular market-capitalisation weighted FTSE 100 Index with a significant reduction in drawdowns.

Drawdown, or a peak-to-trough decline as measured from the time a retrenchment begins to when a new high is reached, is an important metric used by investors concerned about wealth preservation. Larger drawdowns are reflective of higher risk.

Despite the lower risk of the minimum variance index, however, its performance has been superior, having beaten the market-cap index over one, three, five and ten years (see chart below).

To ensure that the index remains well diversified, the weight of any single stock cannot exceed 4.5%, while the weight of an individual industry sector cannot exceed 20%.

The index’s top five holdings are Randgold Resources, Imperial Tobacco, National Grid, United Utilities and Severn Trent. These holdings, plus the next five largest, together represent slightly over 27% of the fund.

This contrasts to the market-cap weighted FTSE 100 Index whose top five holdings are HSBC, BP, Vodafone, Royal Dutch Shell and GlaxoSmithKline, and whose top ten holdings equate to almost 50% of the index.

The fund is listed on the London Stock Exchange and adds to Ossiam’s existing range of products, which includes a number or equal-weight and minimum-variance ETFs tracking US and European equity markets.

Bruno Poulin, CEO of Paris-based Ossiam, said that the launch of the Ossiam ETF FTSE 100 Minimum Variance responds to “investors’ needs for attractive products in diverse equity market configurations.”

The fund will track the index by using full physical replication and Ossiam has vowed not undertake securities lending.

According to Poulin, “Full replication with no securities lending confirms our commitment to provide solutions adapted to UK clients. In our opinion, extra revenues generated by securities lending would not justify the additional layer of risk supported by the fund holders.”

Terry Mellish, Head of UK and Ireland and global consultant relationships for Natixis Global Asset Management UK, distributors of the fund, said, “Minimum-variance-based investment strategies are well-recognised vehicles aiming at mitigating risk in volatile markets. Ossiam ETFs offer smart, easy and transparent ways to diversify equity exposure.”

The ETF has a total expense ratio of 0.45%.

FTSE 100 Minimum Variance Index 5-Year Performance

FTSE 100 Minimum Variance Index 5-Year Performance (GBP Total Return)

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