State Street Global Advisors (SSGA) has launched a new strategy-based ETF in Europe providing exposure to a globally diversified portfolio of equities with low volatility characteristics.
Matteo Andreetto, Head of SPDR ETF Business, EMEA.
The SPDR STOXX Global Low Volatility UCITS ETF has listed on Euronext Amsterdam in euros (GLOW NA) and is set to cross-list on London Stock Exchange in US dollars (GLOW LN) tomorrow.
The ETF comes with an expense ratio of 0.30% and complements the issuer’s existing low volatility UCITS ETFs.
These include the $120m SPDR EURO STOXX Low Volatility UCITS ETF (ELOW LN) and the $260m SPDR S&P 500 Low Volatility UCITS ETF (LOWV LN).
Matteo Andreetto, Head of SPDR ETF Business, EMEA, commented, “Market volatility has become a big challenge for investors, especially during the current pandemic. Our family of smart beta low volatility ETFs, which follow simple, rules-based methodologies, allow investors to modify their portfolios to better reflect their ongoing return-risk appetite in their strategic allocation.
“[Investors] can build defensiveness into portfolios while maintaining a degree of upside potential by allocating part of the core allocation into low volatility strategies.”
Ryan Reardon, ETF Strategist, SPDR ETFs, added, “While economic data has recovered from the lows experienced earlier this year, the persistent uncertainty in equity prices makes low volatility ETFs increasingly relevant. They have the potential to outperform the broader market in uncertain times, providing significant protection to portfolios.”
Methodology
The fund is linked to the STOXX Global Low Risk Weighted Diversified 200 Index which selects its constituents from the parent STOXX Global 1800 Index, a broad reference for developed market performance globally.
This universe contains 1,800 constituents, consisting of 600 of the largest developed market stocks from each of the following three regions: North America, Europe, and Asia Pacific.
The methodology selects the 200 stocks from this universe that have recorded the lowest price volatility over the past year. Constituents are weighted by the inverse of their volatility subject to various security, industry, and country constraints to promote diversification.
Individual stocks have a maximum weight at the lower of 2% or 25 times their weight in the parent index; industry weights are capped at 25%; and country weights greater than 2.5% in the parent index can deviate by 5%, while country weights less than 2.5% in the parent index are capped at three times their initial weight. Rebalancing occurs on a quarterly basis.
The low volatility index presently displays a similar country allocation profile compared to its parent index with the largest exposures being the US (60.4% vs. 63.8%), Japan (8.0% vs. 8.8%), Switzerland (4.8% vs. 3.3%), Germany (4.7% vs. 3.3%), and the UK (4.7% vs. 4.6%).
In terms of industry exposure, however, the index is notably different. Most significantly, exposure to technology stocks, which typically exhibit above-average volatility, is reduced to just 7.6% from 20.5% in the parent index. This reduction is offset by increased allocations elsewhere, particularly to health care (17.6% vs. 13.6%), personal & household goods (12.4% vs. 5.5%), food & beverage (11.2% vs. 3.8%), and retail (10.2% vs. 8.0%).
Lower volatility exposures
Several ETF issuers in Europe maintain lower volatility solutions including BlackRock, DWS, Ossiam, UBS, Lyxor, Vanguard, and Credit Suisse.
BlackRock offers the largest funds with each of its global, US, and European low-volatility ETFs containing over $1bn in assets under management. They are also some of the cheapest with expense ratios ranging between 0.20% and 0.30%. BlackRock recently rolled out ESG-compliant versions of the entire suite.
Most of Europe’s low volatility-themed ETFs, however, are constructed as ‘minimum volatility’ or ‘minimum variance’ strategies which tend to provide broader market exposure and use an optimization algorithim to reduce portfolio volatility. Minimum volatility/variance ETFs typically aim to achieve a portfolio with the lowest possible volatility, subject to conditions.
According to SSGA, low volatility ETFs (which provide exposure to a portfolio of low volatility stocks) are relatively less constrained than their minimum volatility/variance counterparts, enabling them to be more flexible in decreasing volatility factor exposure. SSGA also notes that its ETFs rebalance more frequently, making them more responsive to changing market conditions.