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Can These ETFs Manage Risk and Avoid Black Swans?

  • (0:45) - Why Is It Important To Manage Risk Exposure?
  • (3:20) - QuantX Funds' Risk Management: Macro Risk Indicator
  • (6:35) - QXGG Fund Overview
  • (8:05) - XUSA Fund Overview
  • (10:10) - QXTR: What Kind Of Asset Classes Are Held?
  • (13:35) - The Fund of Funds Approach
  • (14:30) - How Can This Approach Fit Into An Investor's Portfolio?
  • (18:45) - Episode Roundup: Podcast@Zacks.com

Managing risk is an important part of constructing a portfolio, but many investors overlook this crucial aspect. I think this happens because ‘risk management’ is such a nebulous topic.

After all, how do you actually go about managing risk? Many times, low volatility strategies are applied, but sometimes, they don’t really help with drawdown and black swan issues in a big market decline, so what’s an investor to do?

An interesting way to tackle this question comes to us from Blue Sky Asset Management and their brand of QuantX Funds which utilize a risk managed approach. This technique looks to cycle between ‘offense’ (risk-on assets) vs. ‘defense’ (risk off assets) depending on market conditions.

This idea of offense and defense could be a better approach for some, but how does this actually work in practice? To get to the bottom of this, I spoke with the team at Blue Sky Asset Management—Keys Tinney (Managing Partner) and David Varadi (Director of Research)—for this week’s Dutram Report to get some more insights on this approach.

The Approach

I talk with the team about how they go about managing risk for their suite of funds in this market, which includes options for a variety of investors. While they have four funds in this space, we dive a bit deeper into their Risk Managed Growth ETF (QXGG) and their Risk Managed Multi-Asset Total Return ETF (QXTR) for more details.

A key part of this approach is managing drawdown risk, and that is done via a ‘Macro Risk Indicator’. This technique looks at a variety of factors to determine the probability that a given asset class will outperform cash. Things are graded on a scale of 0-100, and this determines how much ‘offense’ or ‘defense’ a portfolio will hold at a given time. As you can see in the chart below which illustrates the index for one of the strategies, the approach can definitely assist in avoiding the worst of the market slumps that can happen in a given cycle.

Beyond this Macro Risk Indicator, I also quiz the team on what is meant by going into defensive assets, and why this does not include volatility instruments, such as VXX, or short exposure. We also talk about some of the risk on selections which include basic building block ETFs like SPY and EFA, but also the company’s XUSA ETF too.

XUSA and QXTR

XUSA is the company’s dynamic beta ETF, which is QuantX’s play on the broad market. We discuss the wisdom of including this fund, and why they think this is a solid choice for exposure. In particular, the team talks about the focus on companies that have more upside volatility versus those that have downside volatility.

The team and I also discuss how the ‘offense’ and ‘defense’ approach works in the multi asset world with their QXTR fund. The list of holdings is pretty unique and includes items like PUTW, but also both SPY and its equal weight cousin, RSP. We talk about why they include both of these S&P 500 ETFs, as well as the pros and cons of diversification too, so make sure to listen to the podcast for more information on that as well.

Finally, David and Keys also talk about why a fund-of-funds approach was used for their risk-managed ETFs, and how they think this strategy fits in to a portfolio. So, make sure to check out today’s podcast for more info on how you might be able to better manage your risk, and protect yourself from black swans too!

Bottom Line

But what do you think about this risk managed approach? Is this something you’ve considered for your portfolio? Make sure to write us in at podcast @ zacks.com or find me on Twitter 

 to give us your thoughts on this, or anything else in the fund market.

But for more news and discussion regarding the world of investing, make sure to be on the lookout for the next edition of the Dutram Report (each and every Thursday!) and check out the many other great Zacks podcasts as well!

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