First Trust launches two actively managed low volatility ETFs

Aug 26th, 2016 | By | Category: Equities

First Trust has launched two new actively managed exchange-traded funds on the NYSE that seek to capture upside price movements in rising markets and reduce downside risk when markets decline. Sub-advised by Horizon Investments, the funds use a proprietary quantitative rules-based investment process to manage volatility.

The funds, the US-focused First Trust Horizon Managed Volatility Domestic ETF (NYSE Arca: HUSV) and the international-oriented First Trust Horizon Managed Volatility Developed International ETF (NYSE Arca: HDMV), invest in common stocks that, based on historical data and forward-looking estimates, are likely to exhibit low future expected volatility.

First Trust launch two actively managed low volatility ETFs

Low volatility strategies can produce superior risk-adjusted returns compared to broad market-cap weighted passive approaches.

The ETFs are the first funds to list on the NYSE using the new streamlining process approved by the US Securities and Exchange Commission last month. The rule aims to shorten the period between initial regulatory filings and product launch for actively managed ETFs by allowing funds that adhere to certain generic characteristics to avoid previously necessary additional filings.

The funds’ managed volatility strategy is based on historical analysis which shows 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.

Robbie Cannon, President and Chief Executive Officer at Horizon, commented: “In this low interest rate environment, we are seeing all kinds of investors participating more and more in equity markets, even those who traditionally looked to fixed income markets. This includes not only investors in the accumulation phase, but also those in the retirement phase who are looking for yield. And while they want equity exposure, they naturally are looking for lower risk and lower volatility products.

“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.”

As of 26 August 2016, the First Trust Horizon Managed Volatility Domestic ETF had 70 holdings with significant exposure to the consumer staples (22.0%), industrials (21.6%), utilities (15.7%), financials (13.7%) and health care (12.8%) sectors. The largest holdings were Johnson & Johnson, Waste Management and Lockheed Martin, which together made up about 11% of the fund. It has a expense ratio of 0.70%.

The First Trust Horizon Managed Volatility Developed International ETF has 150 holdings with significant exposure to financials (30.4%), industrials (17.8%) and consumer staples (14.6%). Companies from Switzerland currently comprise the largest country weight, with 16.7%, followed by Hong Kong (15.7%) and Singapore (11.4%) The fund’s expense ratio is 0.80%.

UK and European-based investors looking for lower volatility strategies have numerous options available to them, including, among others, funds from iShares, SPDR, Lyxor and Ossiam:

The iShares Edge S&P 500 Minimum Volatility UCITS ETF (LSE: SPMV) tracks the S&P 500 Minimum Volatility Index. The fund has assets under management (AUM) of $2.4bn and a TER of 0.20%.

The iShares Edge MSCI World Minimum Volatility UCITS ETF (LSE: MVOL) tracks the MSCI World Minimum Volatility Index. The fund has AUM of $1.6bn and a TER of 0.30%.

The SPDR S&P 500 Low Volatility UCITS ETF (LSE: LOWV) tracks the S&P 500 Low Volatility Index. The fund has AUM of $140m and a TER of 0.35%.

The Lyxor FTSE All World Minimum Variance UCITS ETF (LSE: MVAW) tracks the FTSE All-World Minimium Variance Net Tax Index. The fund has AUM of $31m and a TER of 0.30%.

The Lyxor FTSE USA Minimum Variance UCITS ETF (LSE: MVAU) tracks the FTSE USA Minimum Variance Index. The fund has AUM of $116m and a TER of 0.20%.

The Ossiam World Minimum Variance UCITS ETF (Paris: WOMV) tracks the Ossiam World Minimum Variance Index. The fund has AUM of $9m and a TER of 0.65%.

The Ossiam US Minimum Variance UCITS ETF (LSE: USMV) tracks the Ossiam US Minimum Variance Index. The fund has AUM of $14m and a TER of 0.65%.

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