First Trust Advisors has launched the First Trust Horizon Managed Volatility Small/Mid ETF (HSMV), which seeks to provide capital appreciation while attempting to mitigate volatility using a proprietary quantitative and rules-based investment process with a focus on small and/or mid-capitalisation companies. The fund invests primarily in common stocks that the fund’s sub-advisor, Horizon Investments, LLC (“Horizon”), believes exhibit low future expected volatility.
“Recent volatility has underscored the importance of strategies designed for investors weathering turbulent markets,” says Robbie Cannon, CEO of Horizon Investments. The investment process focuses on small and/or mid-sized companies that Horizon believes may be less volatile than the broader market. “Our active volatility forecasting experience gives Horizon the opportunity to develop offerings like this that keep an eye on risk and capital appreciation in a variety of market environments,” said Cannon.
First Trust believes active portfolio management provides the ability to make the most of the opportunities the market has to offer, such as mispricing resulting from the murky role of volatility as a stock characteristic and the phenomenon known as the low-volatility anomaly. Economic theory would have you believe that those who take on higher risk should be compensated by the potential for higher expected return. The conventional wisdom is that it pays to take chances. However, counterintuitively, history has shown that portfolios of low-beta and low-volatility stocks have produced higher risk-adjusted returns than portfolios of high-beta and high-volatility stocks, in most major markets studied. This phenomenon is known as the low-volatility anomaly.
“Our goal at First Trust is to provide high quality tools for investment professionals. We believe this actively-managed ETF, focused on small and mid-cap stocks with defensive characteristics, such as low volatility, is a compelling strategy for pursuing better risk-adjusted returns,” says Ryan Issakainen, CFA, Senior Vice President, ETF Strategist at First Trust.
The fund’s portfolio managers include Michael Dickson, PhD; Scott Ladner; and Steven Clark, PhD, of Horizon who share responsibilities for the day-to-day management of the fund’s investment portfolio.