US, Connecticut-based investment company Recon Capital Partners has launched a smart beta exchange-traded fund – the Recon Capital USA Managed Risk ETF (NYSE: USMR) – providing access to US large-cap equities while using an optimisation process to minimise the variance of the portfolio.

Kevin R. Kelly, Chief Investment Officer of Recon Capital Partners.

The ETF is linked to the newly created Stoxx USA 900 Minimum Variance Unconstrained Index.

The engine behind the index is a fundamental factor model developed by portfolio risk model provider Axioma. The model uses a covariance matrix of the components of the Stoxx USA 900 Index to weight stocks in such a way that the overall portfolio variance is minimized. As such, the index seeks to provide broad market exposure while reducing downside risk.

Axioma’s factor model updates daily and evaluates the role of over 150 factors (including volatility, exchange-rate sensitivity, value, growth, liquidity and momentum) in driving systemic risk. The portfolio dynamically rotates equities monthly, taking into account current market information.

Due to the unconstrained nature of the index, it is not restricted to the industry or factor constraints of the standard Stoxx USA 900 Minimum Variance Index, thereby affording it a greater ability to focus on managing systematic risk exposures.

During the optimization process, the weight of individual stocks are capped at 8% and the sum of all stocks with weights above 4.5% is capped at 35%. During the index’s monthly rebalance, a maximum turnover of 5% is enforced.

Kevin R. Kelly, Chief Investment Officer of Recon Capital Partners, commented: “We are excited to license the Stoxx USA 900 Minimum Variance Unconstrained Index that has a systematic, risk-controlled approach that responds to changing market conditions.

“Investors are looking for solutions that incorporate an intelligent risk management process that seeks to create a smoother investment experience and defends against losses during sustained market declines. Part of managing risk includes rebalancing risk factors on a monthly basis versus quarterly or semi-annually.”

Matteo Andreetto, Chief Executive Officer, Stoxx, added: “By licensing the Stoxx USA 900 Minimum Variance Unconstrained Index to Recon Capital Partners, market participants in the United States are able to benefit from this innovative low volatility investment strategy that reduces the risk of a portfolio and potentially improves its long-term returns. The unconstrained version is a novelty as it provides a strategy index that is minimized for volatility, but is not restricted to follow the underlying base index too closely.”

As of 31 August 2016, the index had delivered an annualized return of 14.9% with volatility of 9.6% over the past five years, compared to 14.1% per annum return and 14.3% volatility for the parent Stoxx USA 900 Index. These results shine a favourable light on the index’s methodology, highlighting its recent ability to not only reduce overall volatility but to boost returns too, thus leading to superior Sharpe ratios.

Source: Stoxx.

Major components include Clorox (5.0%), Southern Co (4.5%), RITE AID (3.7%), Costco Wholesale (3.5%) and Sysco (3.2%).

The ETF has a total expense ratio (TER) of 0.30%.