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State Street Files For 2 Low Volatility ETFs

December 10th, 2012

Eric Dutram: The ETF industry is back at it again, seemingly undeterred by the large number of closures earlier in the year. A host of new funds have had their debut in the past few months, while issuers are once again putting more products into the pipeline.

In continuing this trend, State Street has just released new plans via an SEC filing for two U.S. focused ETFs. The proposed products look to target different cap levels of the U.S. market, but with a spotlight on securities that have low volatility levels.

If these can come to the market soon, they could take advantage of the current state of affairs in which lower risk securities are in high demand thanks to broad geopolitical risk both at home and abroad. While most details were not released in the initial filing—such as expense ratio and ticker symbol—we will discuss a few of the key points regarding the proposed ETFs below:

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SPDR Russell 1000 Low Volatility ETF

This proposed product looks to track the Russell 1000 Low Volatility index, a benchmark of about 200 securities that have a lower return variable than the overall market. Since it is tracking a large cap benchmark, the fund looks to be focused in on the safest of all the securities in the space, limiting growth potential but also mitigating volatility overall (read Three Low Volatility ETFs for Stormy Markets).

SPDR Russell 2000 Low Volatility ETF

The second ETF in the filing looks to follow the Russell 2000 Low Volatility Index, a benchmark that will possess no more than 400 securities, and will be reconstituted on a monthly basis. Investors should note that the Russell 2000 is a small cap benchmark, so this could be a safer way to target the space, though it could also reduce the growth potential in this proposed ETF.

Low Volatility ETF Competition

The move by SPDR to propose these ETFs suggests that there is still an appetite for these kinds of securities despite there being a good number of choices already out there in the space. Currently, there are over half a dozen low volatility options on the market, although just three track a U.S. benchmark.

Easily the most popular is the PowerShares S&P 500 Low Volatility Portfolio (NYSEARCA:SPLV), which has over $3 billion in total AUM. The ETF zeroes in on low volatility securities in the S&P 500, holding 100 stocks in total and charging investors 25 basis points a year in fees for the service (see Six Easy Ways to Target Low Volatility Stocks with ETFs).

It is also worth noting that this fund, along with all others in the space, have come out within the last 18 months or so, suggesting that the move to low volatility options has begun just recently. Given this, the proposed ETFs from State Street could be jumping into a hot market, suggesting that if they can keep costs down and volatility low, they could see big inflows and solid investor interest, assuming they can pass the SEC’s regulatory hurdles.

Written By Eric Dutram From Zacks Investment Research 

In 1978, Len Zacks discovered the power of earnings estimates revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank, a peerless stock rating system whose Strong Buy recommendation has an average return of 26% per year.


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