ETF providers look to alternative beta

Alternatively-weighted indexes are attracting more and more attention from ETF providers. So far this year Ossiam, PowerShares and State Street have listed ETFs that provide exposure to equities weighted to minimise risk, capture high beta, and increase dividend exposure, writes Hannah Collins

Indexes with alternative weightings are increasingly in vogue

The PowerShares S&P 500 Low Volatility ETF, which was listed in May 2011, attracted the highest monthly inflows of any exchange-traded fund (ETF) listed last year. "Typically for this type of product it takes several years to gather significant assets, but this has got $1.5 billion in just over 10 months," says Xiaowei Kang, London-based director of index research and design at S&P Indices.

Now other providers are following suit. Several new ETFs tracking low volatility indexes have already been launched this year. "Most of the alternative beta ETFs aim to either enhance return and/or reduce risk, due to the current volatility of equity markets," says Kang.

Ossiam listed the Emerging Markets Minimum Variance ETF on the London, Frankfurt, Milan and Paris stock exchanges in the final week of March. The fund tracks a new index, the Ossiam Emerging Markets Minimum Variance Index, which is weighted to minimise the volatility of the portfolio. Calculated by S&P Indices, it includes a selection of emerging markets stocks selected from the S&P IFCI Index, a market cap-weighted index tracking the performance of major companies in 20 emerging countries. Ossiam so far has €227 million in assets under management (AUM) for its minimum variance ETFs, according to Isabelle Bourcier, the firm's Paris-based director of product development.

Earlier this year, on January 18, Ossiam listed the first FTSE 100 Minimum Variance ETF on the London Stock Exchange (LSE), designed to give investors exposure to liquid UK stocks that are weighted to minimise the volatility of the total portfolio. "If you look at the different tenders run by consultants in the UK, minimum variance and minimum volatility strategies are on the agenda," says Bourcier. "We've also heard that there are mandates requesting risk-based, alternatively weighted schemes, notably in Scandinavia, the Netherlands and Germany."

Instead of weighting the stocks according to market cap, they are weighted according to low volatility and low correlation characteristics in comparison to the reference index, says Bourcier.

In January, Invesco PowerShares launched two low-volatility ETFs covering emerging and developed markets. Its S&P Emerging Markets Low Volatility Portfolio is based on the S&P BMI Emerging Markets Low Volatility Index, designed to measure the performance of 200 of the least volatile stocks of the S&P Emerging BMI plus LargeMid Cap Index. The S&P International Developed Low Volatility Portfolio is based on the S&P BMI International Developed Low Volatility Index, which is intended to measure the performance of 200 of the least volatile stocks of the S&P Developed ex US and South Korea LargeMid Cap BMI Index.

Other alternatively weighted index ETFs are also catching investor attention. In February, PowerShares listed two ETFs on the New York Stock Exchange's Arca platform, providing exposure to high-beta strategies for emerging and international developed markets. "There has been a shift, with increasing interest in high beta," says Ed McRedmond, Chicago-based senior vice-president of institutional and portfolio strategies at PowerShares.

The PowerShares S&P Emerging Markets High Beta Portfolio is based on the S&P BMI Emerging Markets High Beta index, while the International Developed High Beta Portfolio is based on the corresponding S&P index. Constituents are weighted according to their beta, with the most sensitive stocks receiving the highest weights. "We are seeing flows starting to pick up in the PowerShares S&P 500 High Beta Portfolio," says McRedmond.

These factor-driven ETFs can provide an efficient method of capitalising on bull markets by adding beta to an investor's portfolio, says Ben Fulton, managing director of global ETFs at PowerShares. At the same time, they give investors the "flexibility to reduce risk in flat or bear markets by adding low-volatility strategies," he says.

Dividend-based strategies have also been a theme in 2012. State Street listed the SPDR S&P Euro Dividend Aristocrats ETF and UK Dividend Aristocrats ETF on Deutsche Börse on February 29, then cross-listed the ETFs on the LSE a day later. So far, the Euro Dividend ETF has garnered €4.7 million, and the UK Dividend ETF £6 million.

State Street launched the first versions of the Dividend Aristocrats ETF in October 2011, with the SPDR S&P US Dividend Aristocrats ETF and the SPDR S&P Emerging Markets Dividend ETF. Since January, the US version has garnered more than $60 million in inflows, bringing the total to $389 million since October. The emerging markets fund has seen more than $34 million in inflows since January.