S&P Dow Jones rolls out S&P Europe 350 Low Volatility Index

Aug 21st, 2012 | By | Category: ETF and Index News

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S&P Dow Jones Indices has announced the launch of the S&P Europe 350 Low Volatility Index, which is designed to measure the performance of the least volatile stocks within the S&P Europe 350, an equity index drawn from 17 major European markets, covering approximately 70% of the region’s market capitalisation.

S&P Dow Jones rolls out S&P Europe 350 Low Volatility Index following interest from exchange-traded fund (ETF) providers

S&P Dow Jones has rolled out the S&P Europe 350 Low Volatility Index following interest from ETF providers.

The launch of the S&P Europe 350 Low Volatility index comes after interest from exchange-traded fund (ETF) providers and follows similar low volatility launches of indices covering emerging markets and developed countries ex-US.

The constituents of the S&P Europe 350 Low Volatility index are weighted by the inverse of their volatility, with the least-volatile stocks receiving the highest weights. The index’s sector exposure is unconstrained and dynamic, responding only to volatility signals.

Vinit Srivastava, director of strategy indices at S&P Dow Jones Indices, said: “Given the volatility in the European equity markets, the S&P Europe 350 Low Volatility index provides market participants with a unique measuring tool for specific stock characteristics within the S&P Europe 350. This new, transparent Index exhibits strong risk and return characteristics, which could be expected to continue given the existence of low volatility anomalies in the equity markets.”

The S&P Europe 350 Low Volatility index follows the recent launch of the S&P 500 Low Volatility index and the S&P/TSX Composite Low Volatility index in the beginning of 2011, as well as the launch of the S&P Emerging Markets Low Volatility index and the S&P International Developed (ex US) Low Volatility index late 2011.

S&P Dow Jones Indices recently published a white paper on the low-volatility effect. Essentially, the low-volatility effect challenges the traditional equilibrium asset pricing theory that an asset’s expected return is directly proportional to its beta or systematic risk, or, in other words, higher-risk securities should be rewarded with higher expected returns while lower-risk assets receive lower expected returns.

Contrary to that theory, empirical evidence has illustrated that low-volatility investing outperforms the broad market as well as high-risk strategies over a long-term investment horizon with much less realised volatility. In the US equity market, for example, the S&P 500 Low Volatility Index returned 6.95% (10.75% standard deviation) on an annualised basis over the 10 years ended March 31, 2012, with lower volatility than a conventional market cap-weighted benchmark such as the S&P 500, which returned 4.12% (15.99% standard deviation).

Whilst low-volatility investing is not a new concept, the financial crisis of 2008 and the eurozone-induced ‘see-sawing’ volatility during the second half of 2011 have brought it back to the investment community’s attention for risk management purposes. It’s no surprise, then, that S&P Dow Jones is not alone in offering a range of low volatility indices.

Rival index providers such FTSE, MSCI, Stoxx and Russell offer comparable products, including the FTSE Global Minimum Variance Index series, the MSCI Global Minimum Volatility suite, the STOXX+ Minimum Variance index family and the Russell-Axioma range.

With persistently choppy markets, these indices have understandably proved popular with ETF providers and their investors. Indeed, the S&P Low Volatility suite already underpins a family of Invesco-sponsored ETFs listed in North America. This family comprises the hugely popular ($2.4 billion in assets) PowerShares S&P 500 Low Volatility Portfolio ETF (SPLV), the PowerShares S&P International Developed Low Volatility Portfolio ETF (IDLV) and the PowerShares S&P Emerging Markets Low Volatility Portfolio ETF (EELV) (all listed on the NYSE), and the PowerShares S&P/TSX Composite Low Volatility Index ETF (TLV), listed on the TSX.

In the UK and Europe the leading ETF providers in the low-volatility space are Ossiam and Lyxor. Ossiam offers a range of minimum variance ETFs including the London-listed Ossiam ETF iStoxx Europe Minimum Variance (EUMV / LEMV), the Ossiam ETF US Minimum Variance (USMV / LUMV), the Ossiam ETF FTSE 100 Minimum Variance (UKMV), and the Ossiam ETF Emerging Markets Minimum Variance (DEMV), while Lyxor offers the NYSE Euronext-listed Lyxor ETF MSCI World Risk Weighted (WLDR) and the Lyxor ETF EURO SMARTIX iSTOXX 50 Equal Risk (ERC).

It seems eminently likely the S&P Europe 350 Low Volatility Index, too, will eventually form the basis of an ETF.

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