Despite the VIX index hovering near a five-year low, memories of the credit crunch, eurozone debt crisis and fiscal cliff saga are all too clear. And with several worrying imbalances in the global economy and talk of quantitative easing being wound down, investors are understandably attracted to low-volatility strategies.
The S&P Korea Low Volatility Index tracks 50 of South Korea’s least volatile stocks.
Indeed, so far this year low-volatility exchange-traded funds (ETFs) have been among the industry’s best selling products, pulling in some $6.5 billion in net new assets in the first quarter.
In keeping with this theme, S&P Dow Jones has continued the build out of its low-volatility index family with the launch of the S&P Korea Low Volatility Index. The new index seeks to measure the performance of the 50 least volatile stocks in the S&P Korea Broad Market Index (BMI).
Similar to the methodology of S&P’s other low-vol indices, the constituents of the index are weighted relative to the inverse of their corresponding volatility, with the least volatile stocks receiving the highest weights. (Volatility is defined as the standard deviation of the security’s daily price returns over the prior 252 trading days).
Modifications are made to constituent weights at each rebalancing to ensure diversification across individual stocks and sectors, with the weight of each constituent constrained between 0.05% and 3.0%, and the weight of each sector capped at 30%.
Major constituents currently include Korea District Heating Corp, Hanmi Pharm Co, Meritz Securities, Samsung Life Insurance and CJ CGV Co. The top sector weights are financials with 24.9%, industrials with 21.2%, materials with 17.9%, consumer staples with 13.0% and consumer discretionary with 7.2%.
Vinit Srivastava, Senior Director of Strategy Indices at S&P Dow Jones Indices, said: “The simple and transparent construction of the index has resonated with market participants. Given the volatility seen in the Korean equity markets, this index will serve as a relevant measure for investors while potentially serving as the basis for future investment products.”
While low-volatility ETFs have been a roaring success in the US and Europe, they are yet to gain traction in Asia. However, the launch of this new index, which will undoubtedly be looked at by local ETF providers, could precipitate the eventual roll-out of these strategies in the region.