First Trust Horizon Managed Volatility Small/Mid ETF (HSMV) seeks to provide exposure to small and mid-cap U.S. stocks while employing volatility management techniques to reduce portfolio fluctuations. This actively managed strategy targets companies with market capitalizations typically between $300 million and $10 billion while implementing risk controls.
How It Works
HSMV uses an actively managed approach that combines fundamental stock selection of small and mid-cap companies with quantitative volatility overlay techniques. The fund's managers select securities based on growth potential and quality metrics, then apply dynamic hedging strategies using derivatives to reduce overall portfolio volatility. Position sizing and exposure levels are adjusted based on market conditions and volatility forecasts, with monthly rebalancing to maintain target risk parameters.
Key Features
- Actively managed volatility control overlay designed to reduce drawdowns during market stress while maintaining upside participation
- Focuses on small and mid-cap segment often overlooked by large-cap focused volatility strategies
- Relatively new fund launched in 2020 with limited performance history but innovative approach to risk management
Risks
- This ETF can lose value if the volatility management techniques fail during extreme market conditions, potentially underperforming unhedged small-cap exposure
- Active management and derivative strategies may result in higher tracking error and periods of significant underperformance versus benchmarks
- Small and mid-cap stocks are inherently more volatile and could decline 40-50% in bear markets despite volatility controls
Who Should Own This
Best suited for tactical allocation (5-15% of portfolio) by investors with medium risk tolerance seeking small-cap exposure with reduced volatility. Appropriate for 3-7 year time horizons where traditional small-cap ETFs may be too volatile. Works well as satellite holding for investors wanting diversification beyond large-cap managed volatility strategies.