First Trust has launched a new actively managed ETF in the US providing exposure to mid- and small-capitalization stocks that are expected to exhibit low volatility, thereby reducing downside risk when markets decline.
Low volatility stocks have historically produced higher risk-adjusted returns than high-volatility stocks in most major markets studied.
The First Trust Horizon Managed Volatility Small/Mid ETF (HSMV US) has listed on NYSE Arca and comes with an expense ratio of 0.80%.
Sub-advised by Horizon Investments, a North Carolina-headquartered asset manager catering to the financial adviser market, the fund seeks long-term capital appreciation with reduced volatility.
Starting with a universe of mid- and small-cap companies listed on US exchanges, Horizon uses a proprietary quantitative model to forecast the future volatility of individual stocks.
The managers consider small- and mid-cap companies to be those with a market capitalization between $100 million and $20 billion.
The portfolio will generally consist of approximately 60 stocks with the lowest expected volatility, although Horizon has discretion over the selection of individual securities and the frequency of portfolio rebalancing.
Due to its active management mandate, the ETF may have higher portfolio turnover which can lead to higher trading costs and capital gains distributions.
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, CEO of Horizon Investments, commented, “Recent volatility has underscored the importance of strategies designed for investors weathering turbulent markets. The investment process focuses on small and mid-sized companies that Horizon believes may be less volatile than the broader market.
“Our active volatility forecasting experience gives Horizon the opportunity to develop offerings like this that keep an eye on risk and capital appreciation in a variety of market environments.”
Ryan Issakainen, Senior Vice President, ETF Strategist at First Trust, added, “Our goal at First Trust is to provide high-quality tools for investment professionals. We believe this actively managed ETF, focused on small- and mid-cap stocks with defensive characteristics such as low volatility is a compelling strategy for pursuing better risk-adjusted returns.”
The fund complements two existing ETFs, launched in August 2016, which utilize Horizon’s actively managed low volatility approach within the US large-cap and international developed markets respectively. The First Trust Horizon Managed Volatility Domestic ETF (HUSV US) has $190m in assets under management and comes with an expense ratio of 0.70%, while the First Trust Horizon Managed Volatility Developed International ETF (HDMV US) houses $140m and costs 0.80%.