Low Carbon ETF (LOWC), China Commercial Paper Fund (KCNY), “Switch” ETN (VQTS) Debut

by on December 4, 2014 | ETFs Mentioned:

U.S. equities got off to a slow start this week, after weak manufacturing data overseas and disappointing Black Friday weekend sales results weighed on stocks. On Tuesday, however, markets managed to shift directions, buoyed by a rebound in the energy sector and stronger construction spending data. Private payrolls, on the other hand, came in below expectations at 208,000 for November [see also ETF Spotlight: MSCI USA Quality Factor ETF (QUAL)].

In ETF news, three new funds made their debut, including State Street’s Low Carbon ETF (LOWC), KraneShares’ China Commercial Paper ETF (KCNY), and UBS’ ETRACS S&P 500 VEQTOR Switch ETN (VQTS).

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Last Friday, State Street introduced its Low Carbon ETF (LOWC), which as the name suggests, targets companies that have a low carbon footprint. To obtain this objective, LOWC tracks MSCI ACWI Low Carbon Target Index, which is a subset of the popular MSCI All Country World Index.

The underlying index is designed to address two dimensions of carbon exposure – carbon emissions and fossil fuel reserves. By overweighting companies with low carbon emissions relative to sales and per dollar of market capitalization, the Index aims to reflect a lower carbon exposure than that of the broad market.

LOWC’s portfolio holds over 1,600 individual holdings, featuring exposure to companies from the U.S., Japan, the U.K., Canada, Switzerland, France, Germany, Australia, China, and Korea. Currently, the top three holdings are Apple (AAPL), Microsoft (MSFT), and Johnson & Johnson (JNJ).

The fund charges an expense ratio of 0.30%.

An ETF First: Chinese Commercial Paper

KraneShares launched its E Fund China Commercial Paper ETF (KCNY) on Tuesday, the first ETF ever to offer exposure to Chinese commercial paper. The fund tracks the CSI Diversified High Grade Commercial Paper Unhedged Index, which aims to deliver attractive yields from investment-grade, renminbi-denominated commercial paper issued in Mainland China by sovereign, quasi-sovereign and corporate issuers. The average maturity for the fund is less than five months [see also Inside the Cyber Security ETF (HACK): Q&A with Christian Magoon].

Commenting on the launch, the fund’s chief investment officer and co-portfolio manager David Zhang noted “China money market funds deliver investment-grade credit quality, very short average maturity of 100 days and yields north of 4.5%-5.0%. Our goal is to deliver a similar product to U.S. investors in an ETF wrapper which provides intra-day liquidity and no minimums. We believe we’ve done that with KCNY.”

KCNY charges an expense ratio of 0.56%.

A Unique “Switch” Strategy

UBS introduced its ETRACS S&P 500 VEQTOR Switch ETN (VQTS) on Tuesday. The fund tracks an index that seeks to simulate a dynamic portfolio that allocates between equity and volatility based on realized volatility in the broad equity market. To obtain this objective, the index’s allocation to the equity component is dynamically adjusted to gain exposure to the S&P 500 with a target volatility of 10%. The remainder of the index is allocated to the S&P 500 VIX Futures Long/Short Switch Index (the “Futures Index”) that allocates between cash and long or short positions in an index of VIX futures with a constant one month maturity.

Essentially, VQTS aims to to capture VIX roll yields and volatility drops (when allocated to short positions in VIX futures) and capture volatility spikes (when allocated to long positions in VIX futures). 

VQTS charges an expense ratio 0.95%. 

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Disclosure: No positions at time of writing.