Today Hartford Funds has launched two ETFs that provide a new take on a low-volatility approach. The Hartford Multifactor Low Volatility International Equity ETF (LVIN) and the Hartford Multifactor Low Volatility US Equity ETF (LVUS) will offer exposures to other factors in addition to low volatility as well as a focus on diversification.
LVIN and LVUS come with expense ratios of 0.39% and 0.29%, respectively. Both funds are listed on the Bats exchange, which is owned by ETF.com’s parent company, CBOE.
The funds’ methodology is designed to reduce volatility by up to 25% relative to the cap-weighted universe, while outperforming and managing other risks to improve that performance. However, the benchmarks have an added dimension that you seldom see with single-factor strategies.
“We are explicitly going after the low-volatility factor but recognizing that a single-factor strategy requires a thoughtful approach,” said Darek Wojnar, Hartford’s head of ETFs.
“We do think overall that low-vol strategies can help clients, but at the same time, we do recognize that a low-vol strategy can underperform. We think that by focusing on the selection of stocks that have exhibited low-volatility characteristics, but also assessing them with regard to quality, value and momentum, can produce overall performance,” he added.
Stocks are initially selected from the universe for low volatility, but the components are optimized based on features such as country (for the international fund), sector, company and size, among others. The methodology maintains neutral-to-positive exposures to factors such as value, momentum and quality to avoid unintended factor risks, according to the prospectus.
Part of the optimization process also involves spreading risk across sectors. Expected tail loss estimations are used to assign weights and equalize risk across sectors. Sectors that have a history of higher risk levels are given less weight, with lower-risk sectors given larger weights.
Many low-volatility strategies have high sector concentrations in sectors like utilities or financials, which the Hartford approach avoids, Wojnar says.
Risk and factor realignments and reconstitutions are done semiannually, the prospectus said.
LVIN’s index covers emerging and developed markets, and targets the top 85% of the covered market capitalization of each component country. The benchmark’s constituents in March ranged in size from $300 million to $270 billion, and it can include from 100 to 1,000 securities.
LVUS’ index, however, covers the top 98% of the U.S. market. It had a size range in March of $500 million to $500 billion, and can include anywhere from 100 to 750 components.
Wojnar notes that LVIN combines exposure to developed and emerging markets, while Hartford’s existing family of multifactor ETFs breaks the development levels into two separate funds. Meanwhile, LVUS takes an all-cap approach to the domestic market, unlike Hartford’s existing U.S. fund, the Hartford Multifactor US Equity ETF (ROUS), which covers just large-cap.
With volatility at record lows, now may seem like an odd time to launch a fund that specifically targets low-volatility stocks, but Wojnar points out that while volatility is currently low, it will eventually go up, and forward-thinking investors will likely want to position their portfolios accordingly.
Contact Heather Bell at [email protected].