VelocityShares Rolls Out Risk-Weighted ETF (ERW)

by on August 1, 2013 | ETFs Mentioned:

Stocks responded with a last hour sell-off to yesterday’s FOMC announcement, yet again signaling uncertainty about how the expected stimulus reduction will actually impact equity markets. Looking ahead, major U.S. indexes still have an opportunity to climb to all-time highs before the end of the week as Friday’s monthly employment data may offer the much-needed catalyst to propel the S&P 500 Index to 1,700 and beyond [see also The Complete Visual History Of SPY].

Amid the ongoing euphoria on Wall Street, VelocityShares expanded its lineup with an intriguing “risk-weighted” ETF on Thursday that looks to offer a compelling alternative to traditional market cap-weighted strategies.

VelocityShares Equal Risk Weighted Large Cap ETF (ERW)

The new VelocityShares ETF looks to join the growing trend of alternative-weighting methodologies; a corner of the ETF market that has seen impressive growth over the past few years as more and more investors have sought out ways to avoid the inherent nuances of traditional market capitalization-weighted funds [Download 101 ETF Lessons Every Financial Advisor Should Learn].


ERW focuses on U.S. large cap equities from the S&P 500 Index with a twist by employing a unique weighting methodology based on each individual security’s risk, rather than its market capitalization. The index behind ERW is powered by a proprietary risk-weighting methodology that measures each stock’s risk exposure and then weights it relative to the entire portfolio so that in the end each security contributes an equal level of risk to the entire benchmark. VelocityShares measures the risk of each stock based on a combination of two metrics: historical volatility and each stock’s sensitivity to market price variation.

The result is a portfolio that avoids the pitfalls of market cap-weighting while also avoiding the over-simplicity of a “Low Volatility ETF,” which takes into account only one measure of risk (historical volatility). ERW is rebalanced quarterly and each component contributes the same level of risk to the basket as a whole [see also Low Volatility ETFdb Portfolio].

Meet the Competition

The new VelocityShares ETF is joining a competitive space, the Large Cap Blend Equities ETFdb Category, which is made up of nearly 40 ETFs. Although ERW offers a truly unique approach, it will still face very stiff competition from more established funds that fall under the “Low Volatility” umbrella, including:

  • PowerShares S&P 500 Low Volatility Portfolio (SPLV, A+with $4.7 billion in AUM
  • iShares MSCI USA Minimum Volatility Index Fund (USMV, A+) with $2.3 billion in AUM
  • PowerShares S&P 500 Downside Hedged Portfolio (PHDG, B) with $55 million in AUM

From a cost perspective, ERW’s expense ratio of 0.65% falls towards the more expensive end of the cost spectrum as the category average stands at 0.43%. The new VelocityShares ETF warrants a closer look from anyone looking to steer clear of market-cap weighted equity exposure, but is also wary of the simplified “low volatility” approach.

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Disclosure: No positions at time of writing.