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
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.
First Asset Investment Management
Factor Weighted – Risk
First Asset Investment Management
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.
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