SPDR ETFs, the exchange-traded funds (ETF) platform of State Street Global Advisors (SSgA), has announced the launch of the SPDR S&P 500 Low Volatility ETF (USLV), the first ETF in Europe to track the S&P 500 Low Volatility Index.
Listed on the London Stock Exchange (LSE), the physically-backed fund tracks the low-volatility version of S&P’s flagship S&P 500 index, providing investors with access to a diversified portfolio of US blue-chip stocks with historically lower volatility.
SSgA will no doubt be hoping the fund emulates the success of the hugely popular NYSE-listed PowerShares S&P 500 Low Volatility Portfolio ETF (SPLV), which tracks the very same index and has accumulated assets of over $2.5 billion since its launch in May last year.
The S&P 500 Low Volatility Index is rebalanced quarterly and includes 100 stocks from the S&P 500 that have had the lowest historical price volatility in the prior 252 trading days. The stocks are then weighted inversely proportional to their volatility, with the least volatile having higher weightings, subject to a 4% cap. The S&P 500 includes 500 leading large-cap US companies and is widely regarded as the best single gauge of the US equities market.
The fund’s launch comes at a particularly apt time with the US market drifting closer to the edge of the so-called “fiscal cliff” of automatic public spending cuts and expiration of tax reliefs scheduled to kick in early next year. As yet, no deal is in sight, meaning there is a very real possibility that Washington gridlock could push the US into recession. Until a deal is reached, uncertainty and volatility is bound to increase. The fund, therefore, could prove an immediate hit with investors looking to avoid some of this volatility and limit portfolio downside risk whilst remaining fully invested in equities.
The underlying index has fulfilled these objectives (S&P 500 exposure with lower volatility and downside risk) before. In fact, the index has even achieved returns in excess of the S&P 500. Over the 10 years to March 31, 2012, for example, the low-volatility index delivered an annualised return of 6.95% with a standard deviation of 10.75%, compared to the regular market cap-weighted S&P 500 which returned 4.12% with a standard deviation of 15.99%.
Commenting on the launch, Scott Ebner, global head of product development at SPDR ETFs, said: “With the volatility in equity markets over the past couple of years, many clients are looking for ways to help reduce the potential drawdown impact of market retreats, while still participating in some of the upside of US equity investing. The SPDR S&P 500 Low Volatility ETF can be used in combination with other US equity exposures to adjust risks or as an alternative to traditional market capitalisation weighted index strategies.”
While the new SPDR ETF is the first in Europe to track the S&P 500 Low Volatility Index, it is not the first in Europe to offer exposure to the S&P 500 with lower volatility. That landmark goes to the swap-based Ossiam ETF US Minimum Variance (LUMV), which launched in June last year and has accumulated assets of over $260 million.
The Ossiam fund is listed on a number of European exchanges, including the LSE, Deutsche Börse and NYSE Euronext, and tracks the Ossiam US Minimum Variance Index NR, a proprietary index reflecting the performance of a dynamic selection of the 250 most liquid stocks from the S&P 500 Index optimally weighted to minimise the volatility of the total portfolio. The index works in a similar way to the S&P index, though is slightly more diversified. Essentially, it aims to capture the equity market performance of the S&P 500 whilst mitigating risk through lower volatility and reduced drawdown.
The SPDR S&P 500 Low Volatility ETF comes with a total expense ratio (TER) of 0.35%, is registered for sale in Ireland, Italy, France, the Netherlands, Sweden and the United Kingdom, and is cross listed on the Deutsche Börse.
The launch takes the total number of SPDR ETFs listed on European exchanges to 42, which includes other US equity products such as the regular SPDR S&P 500 ETF (SPY5), the mid-cap SPDR S&P 400 US Mid Cap ETF (SPY4), and the hugely successful high-dividend SPDR S&P US Dividend Aristocrats ETF (UKDV).