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By Dave Paterson  | Wednesday, August 24, 2016

While it might be a bit too early for many investors to step into direct European equity exposure, those with a higher appetite for risk may want to consider it. One interesting way to get some exposure to the region without taking on the full risk of the market would be to use the First Asset MSCI Europe Low Risk Weighted ETF.

This exchange-traded fund from CI Financial’s First Asset subsidiary provides exposure to the 100 least volatile stocks in the MSCI Europe Index by tracking the MSCI Europe Risk Weighted Top 100 Index (CAD). Stocks that have a lower level of variance are given a higher weight within the index, while those with higher volatility carry a lower weight. Currency exposure in this ETF is hedged, which will help protect against any adverse movements in the value of the Canadian dollar. The index is rebalanced on a quarterly basis.

Given the selection methodology, the portfolio looks somewhat different than the full MSCI Europe Index. Company size tends to skew a little smaller, with an average market cap that is about two-thirds that of the MSCI Europe Index. Sector weights are also different, with this ETF holding overweight positions in more defensive sectors, such as real estate, consumer staples, industrials, and utilities.

While the ETF is relatively new, launched in early 2014, back-tested data to 1999 show this risk-weighted index would have significantly outperformed the broader MSCI Europe Index over the past 3-, 5-, and 10-year periods. Over the past year, it outpaced other hedged ETFs, gaining a modest 2.73%. While not impressive on an absolute basis, when you consider that all other European-focused ETFs but one finished in negative territory, it is a bit more noteworthy.

What really catches my attention about this ETF are its risk metrics. According to the back-tested data provided, the level of volatility was about two-thirds that of the broader European market. Further, it had a down capture ratio of 47%, meaning on average, it experienced only about half the downside of the market, yet was still able to participate in more than 70% of the upside.

One of the bigger drawbacks to most risk-weighted strategies is that the valuation levels tend to run higher than the broader markets. Doing a quick scan of the valuation levels of the available European ETFs, valuation of RWE appears to be better than average. Further, considering the forward-looking earnings estimates, it becomes an even more attractive option.

Going forward, I would expect that with the potential for higher volatility not only in Europe but with markets in general, I see this as a reasonably attractive way to access European equities without taking on a lot of extra risk. I expect that it will continue to hold up well in falling markets, but also that it may lag in rising markets. This is a tradeoff I am comfortable making.

Fund company: First Asset Investment Management
Fund type:
European Equity
FundGrade™ Rating: B
Style: Factor Weighted – Risk
Risk level: Medium
Load status: N/A
RRSP/RRIF suitability: Fair
Manager: First Asset Investment Management
MER: 0.66%
Trading symbol: TSX: RWE

See the Fundata Fund SnapShot for more details.

Dave Paterson, CFA, is the Director of Research, Investment Funds for D.A. Paterson & Associates Inc., a consulting firm specializing in providing research and due diligence on a variety of investment products. He is also the publisher of Dave Paterson’s Top Funds Report, offering regular commentary and in-depth analysis of Canada’s top investment funds. He uses a unique analytical approach to identify funds with strong, risk-adjusted returns, and regularly publishes his insights and analyses in Fund Library.

Notes and Disclaimer

© 2016 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. This article is for information purposes only and is not intended as personalized investment advice.

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