Equity-based exchange traded funds emphasizing volatility strategies, particularly low volatility funds, have been popular investors. Some ETF issuers have taken the volatility a step further with more sophisticated offerings.
That group includes the Compass EMP U.S. Discovery 500 Enhanced Volatility Weighted Index ETF (NasdaqGM: CSF). Since coming to market last August courtesy of Tennessee-based Compass Funds, CSF has led a quiet existence. Arguably, that should not be the case as evidenced by CSF’s ascent to an all-time high Tuesday. The ETF was one of just 27 to accomplish that feat yesterday. [Low Volatility, Positive Earnings in one ETF]
CSF is up 3.1% this year, well ahead of the 0.85% returned by the S&P 500.
CSF tracks the the CEMP U.S. Smal Cap 500 Long/Cash Volatility Weighted Index. That index offers a broad representation of U.S. small-caps with downside protection that compass by way of Compass being able to increase the ETF’s cash allocations in the event of dramatic market pullbacks. [Compass Adds Enhanced Volatility Lineup]
“Based on the month-end price of the CEMP U.S. Small Cap 500 Volatility Weighted Index, the Index will liquidate 75% of the securities if the Index has declined -10% from its daily highest value (DHV). Based on the month-end price, if the Index increases back to or above the -10% decline from its DHV, all securities will be reinvested. The Index would then be fully invested,”according to Compass.
At the end of last year, CSF’s index held 497 stocks with an average market value of $1.7 billion. That puts CSF in the small-cap camp, so it is noteworthy that the fund has outpaced some well-known small-cap benchmarks over the past 90 days.
CSF eliminates single-stock risk by applying weights of 0.08% to 0.45% to its holdings. The ETF’s top 10 holdings combine for just 3.71% of the fund’s weight.
CSF offers another source of allure: The potential to be a viable option when interest rates rise. The ETF allocates just 9.5% of its combined weight to rate-sensitive consumer staples, telecom and utilities stocks. Conversely, the ETF is heavily allocated to late-cycle sectors that often perform in rising rate environments. For example, industrial and technology names combine for almost 34% of the ETFs weight. [The Right Dividend ETFs for Rising Rates Protection]
Additionally, CSF sports an almost 25% weight to the financial services sector, notable because small-cap banks stand to benefit more from higher interest rates than their large-cap counterparts due to increased net interest margins.
Compass EMP US Discovery 500 Enhanced Volatility Weighted Index ETF
