A Smarter Way to Invest in the World
Access global markets with low-risk weighted ETFs
By: Barry Gordon, President and CEO, First Asset
For many years, exchange traded funds (ETFs) have been a transparent, low-cost way for Canadian investors to participate in any number of broad markets or specialized sectors. To meet changing investor needs, ETFs have evolved from their original purpose of replicating the performance of a specific index to the next generation of "smart beta" ETFs that seek to deliver superior risk-adjusted returns.
Smart beta indexing, also known as factor-based investing, is a strategy that considers the many drivers that can influence a stock's risk-return profile, including market capitalization, earnings momentum, historical volatility, price-to-earnings ratios, etc. Depending on the particular ETF's objective, the driver(s) will help determine how to weight the stock holdings in the portfolio to enhance performance and lower risk. In the historical volatility example, if a certain stock has had relatively low volatility in the past, it will have a higher weighting in the ETF relative to higher volatility stocks.
The low-risk approach to going global
Most people already know they should invest beyond Canada to benefit from geographic diversification. Canada has outstanding companies, but these companies are largely concentrated in three sectors - financial services, energy and materials.
So why do many Canadians choose to invest only in Canada? Likely it's because they are more comfortable investing in familiar names, and less comfortable trying to sort through the massive universe of stocks available outside of Canada. Traditional ETFs that track the performance of a global or international market take the challenge out of selecting stocks, but do not provide investors with the opportunity to outperform that market or benefit from stronger risk management.
This is where smart beta ETFs hold a distinct advantage. ETFs that offer broad market exposure to the geographic regions they represent, while also being weighted on the basis of low volatility (for example), have the potential to provide stronger returns with a lower risk profile than ETFs that are weighted based on size alone.
First Asset, a leading manager of ETFs that aim to deliver superior risk-adjusted returns, recently introduced two low-risk weighted ETFs based on global and international MSCI risk-weighted indices.
For a convenient, low-risk approach to investing in foreign markets, First Asset now offers:
- First Asset MSCI Europe Low Risk Weighted ETF (TSX:RWE), which offers broad exposure to the lower volatility stocks of developed large- and mid-capitalization companies in Europe and the potential for enhanced risk-adjusted returns.
- First Asset MSCI World Low Risk Weighted ETF (TSX:RWW), which provides broad exposure to the lower volatility stocks of developed large- and mid-capitalization companies from around the world and the potential for enhanced risk-adjusted returns.
Whereas the "market indexes" - MSCI Europe Index and MSCI World Index, respectively - are weighted according to market capitalization, First Asset's low-risk ETFs re-weight each security of the parent index, so larger weightings are given to lower-risk stocks. This approach may include high-volatility stocks found within the index, but these holdings will have lower weightings. This way, the performance of the majority of stocks in that market are captured, but the result is lower realized volatility than the parent index.
Both of the First Asset low-risk weighted ETFs are available either hedged or unhedged to the Canadian dollar, depending on whether an investor wants to avoid the impact of multiple currency movements on the ETF's return (hedged version) or prefers the potential benefits of foreign currency diversification (unhedged version). Either way, First Asset's smart beta strategies focus on minimizing volatility and reducing portfolio risk, while providing access to the potential for enhanced risk-adjusted returns.
For more information about how to access international markets and achieve better risk-adjusted returns than the broader market with low-risk weighted ETFs, please contact First Asset Exchange Traded Funds at 1.877.642.1289.
Important information about each First Asset ETF Fund is contained in its respective prospectus. Individuals should seek the advice of professionals, as appropriate, prior to investing. This investment may not be suitable for all investors. Some conditions apply. Copies of the prospectus may be obtained from your investment advisor, First Asset or at www.sedar.com. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. ETFs are not guaranteed, their values change frequently and past performance may not be repeated.
The commentaries presented are prepared as a general source of information. They are not intended to provide specific individual advice including, without limitation, investment, financial, legal, accounting or tax. The opinions contained in this document are solely those of First Asset and are subject to change without notice. First Asset assumes no responsibility for any losses or damages, whether direct or indirect, which arise from the use of this information and expressly disclaims liability for any errors or omissions in this information. First Asset is under no obligation to update the information contained herein.