On Tuesday, First Trust launched a new ETF working as an actively managed strategy seeking to deliver a low volatility portfolio of small and mid-cap stocks.
First Trust Advisors L.P., a leading ETF provider and asset manager, announced the launch of the First Trust Horizon Managed Volatility Small/Mid ETF (NYSE Arca: HSMV). The fund 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-capitalization 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,” said 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 a 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,” said Ryan Issakainen, CFA, Senior Vice President, ETF Strategist at First Trust.
The fund’s portfolio managers include Michael Dickson, Ph.D.; Scott Ladner; and Steven Clark, Ph.D., of Horizon who share responsibilities for the day-to-day management of the fund’s investment portfolio.
About First Trust
First Trust is a federally registered investment advisor and serves as the fund’s investment advisor. First Trust and its affiliate First Trust Portfolios L.P. (“FTP”), a FINRA registered broker-dealer, are privately held companies that provide a variety of investment services. First Trust has collective assets under management or supervision of approximately $138 billion as of February 29, 2020, through unit investment trusts, exchange-traded funds, closed-end funds, mutual funds, and separately managed accounts. First Trust is the supervisor of the First Trust unit investment trusts, while FTP is the sponsor. FTP is also a distributor of mutual fund shares and exchange-traded fund creation units. First Trust and FTP are based in Wheaton, Illinois. For more information, visit https://www.ftportfolios.com.
Horizon is a registered investment adviser focused on modern goals-based investment management. Founded in 1995, the firm is based in Charlotte, NC, and works in partnership with financial advisors to deliver investment strategies that align clients’ wealth with their life goals. Horizon implements its global and active investment strategies through model accounts, collective investment funds, mutual funds and ETFs. The firm was recognized in 2018 and 2019 as Asset Manager of the Year (< $25B AUM) by Money Management Institute (MMI) and Barron’s, and 2018 Manager of the Year and Strategist of the Year by Envestnet and Investment Advisor Magazine. The firm has also received numerous other industry commendations for its investment management expertise. For more information, visit https://www.horizoninvestments.com/.
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