Low-volatility exchange traded funds have been a popular addition for investors interested in reducing exposure to roller coaster stocks. Now, VelocityShares has brought out its own fund that equally weights risk exposure of stock components.
According to a press release, the VelocityShares Equal Risk Weighted Large Cap ETF (NASDAQ:ERW) started trading Wednesday, July 31. ERW tries to reflect the performance of the VelocityShares Equal Risk Weighted Large Cap Index, which includes components taken from the S&P 500 but weights stocks equally so that each holding is expected to contribute the same level of risk to the index. Essentially, volatility is equally weighted. In comparison, other equally weighted ETFs just hold an equal exposure to each component holding. ERW has a 0.65% expense ratio.
"Investors are interested in low volatility equity portfolios, and equal risk weighting represents an important step forward as a means of intelligently allocating to low volatility stocks," Nick Cherney, Chief Investment Officer and Co-founder of VelocityShares, said in the press release.
The ETF's top holdings include CME Group Inc 3.9%, Monster Beverage Corp 3.9%, Spetra Energy Corp 3.3%, Dell 1.8% and Merck 1.8%. So under the volatility equal-weight methodology, one can assume that CME Group shows the least volatility.
In comparison, the iShares MSCI USA Minimum Volatility ETF (NYSEARCA:USMV) keeps stocks weighted within 0.05% to 1.5% of the portfolio, sector weightings within 5% of the market-weighted index. Additionally, the PowerShares S&P 500 Low Volatility Portfolio (NYSEARCA:SPLV) weights the 100 least-volatile S&P 500 stocks by the inverse of their volatility - the least volatile stocks have a heavier weighting.
Max Chen contributed to this article.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.