![The last 4 years have been challenging for investors due to the increased volatility in equity markets Since Jan ‘08, the S&P 500 index has exhibited fluctuations of >1% on 40% on all trading days ,[object Object],Professional investors have traditionally managed volatility risk using derivatives Individual investors have had fewer tools to reduce their risk while maintaining equity exposure Introduction](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)
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Volatility & Beta Weighted ETFs
- 1. Volatility & BetaWeighted Equity ExchangeTraded Funds(ETFs) A 5 Step Guide www.firstbridgedata.com
- 4. What is volatility and beta weighting?
- 5. How does this affect portfolio exposure?
- 6. How can these funds be used?
- 8. How are most ETFs traditionally constructed? As we can see in chart 1, the top 20% (i.e. largest 100 stocks by market cap) account for 65% of the fund’s assets. The top 300 stocks account for over 90% of assets. Note: Data as of 9/9/2011. In actual practice, most ETFs will also hold a small proportion of the $1,000 in cash or other liquid instruments.
- 10. Beta refers to stock’s sensitivity to overall marketWhat is volatility and beta weighting?
- 12. Every stock in the fund gets weighted in inverse proportion to its volatility. Our hypothetical $1,000 is now invested so that the stocks with the lowest volatility get the highest shareChart 2: Methodology overview for ‘SPLV’
- 17. Turnover for market cap weighted SPY is typically <10%* Based on backtested data
- 18. Volatility & Beta Weighted Equity ETFs As of 9/9/11. These numbers are subject to change by the ETF sponsor
- 19. Volatility and beta weighted ETFs offer investors a new way to adjust the risk in their portfolios, if they have a directional view on the market. However, investors should consider that these funds are not guaranteed to meet their directional objectives, and will have higher turnover than more traditional market cap weighted ETFs like SPY. Summary
- 20. About First Bridge First Bridge publishes custom research and web based tools on Exchange Traded Funds (ETFs) for financial advisors and self-directed investors. First Bridge is an independent research provider and not affiliated with any fund manager. First Bridge is located in the San Francisco Bay area. Email : support@firstbridgedata.com Tel: (650) 762-9270 Web : www.firstbridgedata.com