On Wednesday, Compass EMP will release three new smart beta volatility ETFs designed to select holdings according to fundamental and volatility rankings.
These new funds will be the first foray into the ETF world for Compass EMP -- a firm that is traditionally known as a mutual fund manager and registered investment advisor.
According to its press release, the Compass EMP U.S. 500 Volatility Weighted Index ETF (CFA), Compass EMP U.S. 500 Enhanced Volatility Weighted Index ETF (CFO) and the Compass EMP U.S. EQ Income 100 Enhanced Volatility Weighted Fund (CDC) will be listed on the NASDAQ exchange.
These new ETFs will charge an expense ratio between 0.58 and 0.68 percent.
CFA selects 500 of the largest U.S.-based stocks, with more than four quarters of positive earnings, and weights them according to volatility criteria. The stocks with the lowest overall volatility receive the largest weighting within the index, while the highest volatility stocks have reduced exposure. The index is rebalanced twice a year and individual sector exposure is capped at 25 percent.
The two enhanced volatility funds, CFO and CDC, are constructed according to similar characteristics -- with the ability to reduce exposure to stocks when the index declines more than 10 percent from its recent high. CFO is constructed of the same 500 stocks as CFA, while CDC is based on 100 high dividend paying companies.
These enhanced funds can reduce their exposure to equities by up to 75 percent under certain extreme conditions, and then reallocate back to the market when certain criteria are met. Liquidated holdings are temporarily moved to cash until the all-clear sign is given.
These new ETFs will likely try to capitalize on the success of the iShares MSCI U.S. Minimum Volatility ETF (NYSE:USMV) and PowerShares S&P 500 Low Volatility Portfolio (NYSE:SPLV), which together have nearly $7 billion in total assets under management.
Low volatility strategies allow you to still participate in a rising market, while potentially reducing the draw down associated with a correction. They also attempt to reduce peaks and valleys that high beta stocks can introduce in traditional fully-loaded indexes.
Disclosure: The author owned shares of USMV at the time this article was published.
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