Provides an overview of Low Volatility ETFs - the benefits of using them in a portfolio as well as some of the key risks. This is a brief extract from a 30-page ebook on the subject of Low Volatility ETFs published by First Bridge Data.
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Low Volatility Exchange Traded Funds (ETFs)
1. Low Volatility & High Beta
Exchange Traded Funds
(ETFs)
An overview
2. Why You Should Pay Attention to Low Volatility ETFs
• Lowers the risk of drawdown in your equity portfolio
• Provides differentiated exposure compared to value & dividend ETFs
• Does the work for you through “smart indexing”
Understanding How They Are Constructed & How To Use Them
• Downside protection in a declining market
• The “purity” vs. “parent index tracking” trade-off
Risks of Using These ETFs
• Sector concentration; Underperformance in bullish markets; Impact of
rising interest rates
3. • As an investor, one of the most important issues to focus on is your
strategy for dealing with market downturns.
• It’s a mathematical truism, but a 50% drop in your portfolio would
require a subsequent gain of 100% to return to the starting value.
• Successful investors recognize this, and consequently their
investment strategy is focused on addressing downside volatility.
• Low volatility ETFs address this.
5. • During market downturns, investors sometimes move into cash or
into defensive sectors or ETFs (such as value or dividend ETFs) – low
volatility may represent an alternative approach.
• A factor analysis of low volatility ETF by our team showed that they
behave very differently from value and dividend ETFs.
• Our historical analysis of SPLV over the last 6 years showed that it
had more of a growth tilt than a value tilt. This was counter-intuitive,
since low volatility has traditionally been identified with value investing.
6. Wide Range of Low Volatility & High Beta ETFs
• There are now over 15 Low Volatility & High Beta ETF available in
the US.
• Provide access to a range of geographies and market cap ranges.
• An updated list of ETFs can be obtained from:
www.firstbridgedata.com/screener
(select ‘Volatility’ from the ‘Quant strategies’ dropdown)
7. The ETF Construction Methodology Can Vary
• Usually derived from a broader parent index like the S&P 500 or
Russell 2000 .
• All of these ETFs are weighted differently from their parent indices
(by volatility rather than by market cap).
• Some ETFs (such as SPLV) emphasize ‘purity of exposure’ while
others (such as USMV) optimize to reduce sector concentration and
divergence from the parent index.
8. Using These ETFs In Your Portfolio
• Can provide downside protection in a bearish or mature bull market.
– Provides an alternative to moving into cash (which can cause high portfolio churn)
or into defensive stocks
• High beta ETFs can provide a bullish tilt in a rising market.
– High beta ETFs are designed to be highly sensitive to movements in the broader
market
• Can provide diversification in a broad based portfolio.
9. • Sector concentration: Some low volatility ETFs can have a high
concentration in specific sectors such as utilities & consumer staples.
• Rising interest rates: These ETFs may have a high degree of exposure
to high yield sectors that are vulnerable to increases in interest rates.
• Directional movement: Although designed to move in a certain
direction relative to the market, this is not guaranteed to happen.
• Underperformance: In rising markets, low vol strategies under-perform
10. • Our 30-page e-book ‘Low Volatility ETFs: An Insider’s Guide’
addresses these topics in detail and can be purchased at:
https://www.smashwords.com/books/view/323885
Or by searching for ‘Low Volatility’ on www.smashwords.com
• Reviews for other work by our founder:
ETF Investment Strategies (McGraw-Hill; August 2013)
“A terrific read. Aniket is a tour guide for the essentials of the
subject…..”
-- Brendan Conway, ETF Editor & Columnist, Barron’s
11. First Bridge is a provider of institutional quality data & analytics on
ETFs, and maintains one of the most comprehensive ETF databases in
the US.
Management team has significant experience in the ETF and index-
based investing industry.
First Bridge is headquartered in the San Francisco Bay area.
Email : support@firstbridgedata.com
Tel : (650) 762-9270
Web : www.firstbridgedata.com
Twitter : @firstbridgedata
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provided in this document is not and should not be considered investment advice. First Bridge
Data shall not be liable for any actions or decisions you make based on the information provided
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