European exchange-traded fund provider Source has launched the Source RBIS Equal Risk Equity US UCITS ETF (LON: RUQR) in partnership with Risk Based Investment Solutions (RBIS), a subsidiary of Rothschild & Co. The smart beta ETF, the second such collaboration between the two investment houses, aims to provide large-cap US equity exposure with lower volatility than traditional market cap-weighted strategies.
Chris Mellor, Executive Director, Equities Product Management, at Source.
The London-listed ETF tracks the proprietary R Risk-Based US Equity Index. The methodology behind this index begins by identifying the largest 500 US stocks by market cap which form the eligible universe of stocks. From this, the 250 stocks with the lowest risk (on the basis of their volatility and correlation) are selected. Stocks are then weighted such that they each contribute an equal amount of risk to the final portfolio.
The index is rebalanced monthly and reviewed quarterly.
Since January 2015, the index has outperformed the S&P 500 (with annualized returns of 7.77% vs 7.02%) while delivering 3% lower annualized volatility. Over this period, the index has thus produced a superior risk-adjusted return and delivered a Sharpe ratio of 0.62 vs 0.45 for the S&P 500.
Chris Mellor, Executive Director, Equities Product Management, at Source, commented: “The launch of this latest product reflects Source’s commitment to providing best-in-class smart beta strategies and the products that investors are increasingly looking for in today’s volatile, risk-conscious markets. We believe that this form of risk control offers a significant step forward beyond volatility targeting and minimum variance strategies. Source is also committed to working with best-in-breed partners and is delighted to be working once again with Rothschild.”
The index is heavily weighted towards the consumer staples sector at just over 30% allocation, while consumer discretionary, utilities and industrials also play significant roles with approximately 16%, 15% and 11% respectively.
The ETF is available to trade in USD on the London Stock Exchange and has a total expense ratio (TER) of 0.48%.
The ETF complements the two firms’ first collaboration, the Source R Equal-Risk European Equity UCITS ETF (Xetra: REQR), which debuted in January 2015. This ETF tracks the R Risk-Based European Equity Index, providing broad European exposure with lower volatility compared to market cap-weighted indices. Since inception, the fund has garnered €137m in assets and delivered an 11.4% return (approximately 5% ahead of the MSCI Europe Index). It too has a TER of 0.48%.
The methodology driving both the two Source-RBIS ETFs is similar in concept to that adopted by the Lyxor MSCI Europe ERC UCITS ETF (Euronext: ERC). This ETF tracks the MSCI Europe ERC Index, comprising constituents of the MSCI Europe Index (which captures large- and mid-cap representation across 15 developed markets countries in Europe) where weights are determined in order to make the risk contribution of each component of the index equal. It has a TER of 0.25%.
Commenting on the launch of RUQR, Catherine Adibi, Managing Director at RBIS, said: “This product offers the same innovative and successful strategy as the European equity-centred ETF but for US-focused investors. Most traditional constituent selection methods treat risk as an incidental consequence of the process: the Source RBIS Equal Risk Equity US UCITS ETF effectively turns the process around by using risk as an input. It provides a compelling investment strategy with a proven index track record.”
Broadly speaking, the new fund will be positioned in the smart beta low volatility / minimum variance segment and will likely come up against the likes of the iShares Edge S&P 500 Minimum Volatility UCITS ETF (LON: SPMV), TER – 0.20%; the Ossiam US Minimum Variance UCITS ETF (LON: USMV), TER – 0.65%; the Lyxor FTSE USA Minimum Variance UCITS ETF (LON: MVAU), TER – 0.20%; the SPDR S&P 500 Low Volatility UCITS ETF (LON: LOWV), TER – 0.35%; and the UBS Factor MSCI USA Low Volatility UCITS ETF (LON: UC95), TER – 0.25%.