Elston Consulting has licensed the ETF-based Elston Strategic Beta Global Minimum Volatility Index to Commerzbank for the creation of an investable certificate. The certificate is issued with an initial notional of £10m.
Ranye Lu, Quant Strategist, Elston Consulting.
The index provides a globally diversified multi-asset long-term growth strategy while minimizing volatility through Elston’s proprietary optimization approach.
Whereas most minimum volatility indices relate to a single asset class, Elston’s approach targets the minimum volatility portfolio created from a globally diversified range of asset classes including equities, government bonds, corporate bonds, commodities and alternatives.
The exclusive use of ETFs increases the transparency, cost-efficiency, and liquidity of future investment products using the index as its underlying reference.
Transparency comes from the rules-based approach of the index, liquidity comes from the nature of the underlying securities, and lower cost comes from the use of ETFs as the building blocks of the strategy.
The index officially launched in December 2014.
Using back-tested data the index has returned 8.4% per annum since its inception in January 2004 with a Sharpe ratio of 0.89. This compares favourably to Sharpe ratios of 0.31 for global equities (MSCI World Index), 0.47 for bonds (JP Morgan Global Aggregate Bond Index) and -0.18 for commodities (S&P GSCI Index). The index has also outperformed on a risk-adjusted basis over the past year with a Sharpe ratio of 2.32 compared to 1.94, 1.90 and 1.45 for equities, bonds and commodities over the same period respectively. (Data as of the end of December 2016)
Index performance since inception is graphed below.
Source: Elston Consulting.
Ranye Lu, Quant Strategist, Elston Consulting, said: “This index has been tested through some volatile times, and we are satisfied that it has delivered in line with its design brief. It is always important that the strategies we develop are readily investable, so we are delighted that Commerzbank is licensing the index to launch these certificates.”
According to Elston, the objective of providing diversified, differentiated returns with downside risk mitigation makes this strategy similar in function to a hedge fund, from a portfolio construction perspective. Constructing this alternative investment approach using a dynamically rebalanced mix of ETFs brings the benefit of transparency, liquidity and lower cost, resulting in these strategies being referred to colloquially as “Liquid Alternatives”.
Elston has been a member of BlackRock’s iShares Connect programme since April 2014. The programme aims to connect ETF specialists with financial advisers looking to construct robust ETF model portfolios.
Joe Parkin, Head of iShares Wealth & Retail UK Sales at BlackRock said: “We aim to offer a broad range of ETFs with different characteristics as building blocks for smarter investment strategies. We welcome innovation of this kind that makes alternative investment strategies more broadly and cost-efficiently available.”