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Low Volatility Exchange Traded Funds (ETFs)

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Provides an overview of Low Volatility ETFs - the benefits of using them in a portfolio as well as some of the key risks. This is a brief extract from a 30-page ebook on the subject of Low Volatility ETFs published by First Bridge Data.

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Low Volatility Exchange Traded Funds (ETFs)

  1. 1. Low Volatility & High BetaExchange Traded Funds(ETFs)An overview
  2. 2. Why You Should Pay Attention to Low Volatility ETFs• Lowers the risk of drawdown in your equity portfolio• Provides differentiated exposure compared to value & dividend ETFs• Does the work for you through “smart indexing”Understanding How They Are Constructed & How To Use Them• Downside protection in a declining market• The “purity” vs. “parent index tracking” trade-offRisks of Using These ETFs• Sector concentration; Underperformance in bullish markets; Impact ofrising interest rates
  3. 3. • As an investor, one of the most important issues to focus on is yourstrategy for dealing with market downturns.• It‟s a mathematical truism, but a 50% drop in your portfolio wouldrequire a subsequent gain of 100% to return to the starting value.• Successful investors recognize this, and consequently theirinvestment strategy is focused on addressing downside volatility.• Low volatility ETFs address this.
  4. 4. Source: First Bridge analysis
  5. 5. • During market downturns, investors sometimes move into cash orinto defensive sectors or ETFs (such as value or dividend ETFs) – lowvolatility may represent an alternative approach.• A factor analysis of low volatility ETF by our team showed that theybehave very differently from value and dividend ETFs.• Our historical analysis of SPLV over the last 6 years showed that ithad more of a growth tilt than a value tilt. This was counter-intuitive,since low volatility has traditionally been identified with value investing.
  6. 6. Wide Range of Low Volatility & High Beta ETFs• There are now over 15 Low Volatility & High Beta ETF available inthe US.• Provide access to a range of geographies and market cap ranges.• An updated list of ETFs can be obtained from:www.firstbridgedata.com/screener(select „Volatility‟ from the „Quant strategies‟ dropdown)
  7. 7. The ETF Construction Methodology Can Vary• Usually derived from a broader parent index like the S&P 500 orRussell 2000 .• All of these ETFs are weighted differently from their parent indices(by volatility rather than by market cap).• Some ETFs (such as SPLV) emphasize „purity of exposure‟ whileothers (such as USMV) optimize to reduce sector concentration anddivergence from the parent index.
  8. 8. Using These ETFs In Your Portfolio• Can provide downside protection in a bearish or mature bull market.– Provides an alternative to moving into cash (which can cause high portfolio churn)or into defensive stocks• High beta ETFs can provide a bullish tilt in a rising market.– High beta ETFs are designed to be highly sensitive to movements in the broadermarket• Can provide diversification in a broad based portfolio.
  9. 9. • Sector concentration: Some low volatility ETFs can have a highconcentration in specific sectors such as utilities & consumer staples.• Rising interest rates: These ETFs may have a high degree of exposureto high yield sectors that are vulnerable to increases in interest rates.• Directional movement: Although designed to move in a certaindirection relative to the market, this is not guaranteed to happen.• Underperformance: In rising markets, low vol strategies under-perform
  10. 10. • Our 30-page e-book „Low Volatility ETFs: An Insider‟s Guide‟addresses these topics in detail and can be purchased at:https://www.smashwords.com/books/view/323885Or by searching for „Low Volatility‟ on www.smashwords.com• Reviews for other work by our founder:ETF Investment Strategies (McGraw-Hill; August 2013)“A terrific read. Aniket is a tour guide for the essentials of thesubject…..”-- Brendan Conway, ETF Editor & Columnist, Barron’s
  11. 11. First Bridge is a provider of institutional quality data & analytics onETFs, and maintains one of the most comprehensive ETF databases inthe US.Management team has significant experience in the ETF and index-based investing industry.First Bridge is headquartered in the San Francisco Bay area.Email : support@firstbridgedata.comTel: (650) 762-9270Web : www.firstbridgedata.comTwitter : @firstbridgedata
  12. 12. First Bridge Data does not intend this document to provide investment advice, and the informationprovided in this document is not and should not be considered investment advice. First BridgeData shall not be liable for any actions or decisions you make based on the information providedin this document and you assume all risk associated with any investment decision you makebased on information contained in this document. First Bridge Data is not a registered investmentadvisor or broker and First Bridge Data does not recommend specific securities, funds orinvestment strategies, nor does it advocate the purchase or sale of any individual investmentvehicle. Discussion or references to specific securities or investment products in this documentshould not be considered endorsements or offers to buy or sell those products. The pastperformance of a mutual fund or exchange traded fund (ETF), security, or investment strategycannot guarantee its future performance.First Bridge Data has no obligation to update this document or to correct any errors or omissionsthat might be contained in this document. First Bridge Data and its content providers disclaim allwarranties of any kind, expressed or implied, and hereby disclaim and negate all other warranties,including without limitation, implied warranties or conditions of merchantability, fitness for aparticular purpose, or non-infringement of intellectual property or other violation of rights. NeitherFirst Bridge Data nor its content providers warrants or guarantees the completeness, accuracy ortimeliness of any data in this document, including any data sourced through third party contentproviders.
  13. 13. Neither First Bridge Data, its employees, third-party content providers, nor any person throughwhom First Bridge Data makes this document available, shall be liable for any direct, indirect,incidental, punitive, special or consequential damages (including without limitation, attorneysfees), whether in an action of contract, negligence or other tortious action, that result from the useof this document. Neither First Bridge Data nor its content providers shall be liable for anypunitive, special, indirect, or consequential damages arising from or relating to the foregoing,whether in contract or tort or otherwise, even if First Bridge Data or its content provider has beenadvised of the possibility of such damages.

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