BlackRock’s iShares has deepened Europe’s ETF price war by launching its first range of minimum volatility exchange-traded funds at annual fees that substantially undercut similar products from competitors. The new “smart beta” trackers are also priced at a surprising discount to some of iShares’ simpler index ETFs.
The four new physically backed trackers are the iShares S&P 500 minimum volatility, MSCI Europe minimum volatility, MSCI World minimum volatility and the MSCI Emerging Markets minimum volatility ETFs. The funds carry annual total expense ratios of 0.2, 0.25, 0.3 and 0.4 percent, respectively.
The ETFs, which are first of their kind on their respective indices, have been listed on the London Stock Exchange and give investors access to a range of markets while aiming to offer reduced volatility compared to standard market capitalisation-weighted indices.
The indices underlying iShares’ minimum volatility funds follow a so-called mathematical “optimisation” to construct portfolios that aim to carry lower levels of risk. This optimisation uses both stocks’ historical risk and the previous correlations of stock price movements to produce a portfolio that is designed to give a smoother ride to investors than a standard equity index fund, which uses stocks’ market capitalisations to determine index weights.
iShares’ minimum volatility ETFs follow a similar construction methodology as the so-called minimum variance ETFs offered by competitors in the European ETF market, such as Ossiam.
A simpler take on the low-volatility approach is offered by ETFs such as the SPDRs Europe S&P low volatility ETF, which selects the stocks from the parent index (S&P 500) with the lowest historical variability of return and then weights them by the inverse of their historical volatility.
[The rising popularity of low-volatility and minimum variance ETFs and the details of their construction are explored in greater depth in our feature article, “Less Risk, More Return”]
iShares has priced its new ETFs aggressively by comparison with similar smart beta products from competitors.
For example, its new S&P 500 minimum volatility ETF charges 0.2 percent a year, while SPDRs Europe’s S&P 500 low volatility ETF, which follows a simpler index methodology, charges 0.35 percent and Ossiam’s US ETF minimum variance, which is closest in design to iShares’ new fund, charges over three times more, at 0.65 percent a year.
iShares’ version of a minimum volatility emerging markets equity index, based on an index from MSCI, carries fees of 0.4 percent per annum, while Ossiam’s ETF emerging markets minimum variance charges 0.75 percent.
Surprisingly for so-called smart beta index trackers, which are usually priced at a premium to standard funds, iShares also undercuts its own funds based on simpler index versions of the same underlying equity market. The firm’s minimum volatility version of the S&P 500 carries an annual fee that’s exactly half the standard, capitalisation-weighted iShares S&P 500 index ETF (0.2 percent versus 0.4 percent a year).