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There’s this idea bubbling up to the surface that stocks may be getting a little expensive. After all, we’ve had roughly eight years of rising equity prices. That’s given way to potentially overpriced stocks. Earnings and revenues certainly haven’t kept up with current valuations. And let’s not forget the current geopolitical situation in the United States, France, China, etc. Risk is back on the table.
With investors likely getting nervous, ETF sponsors have taken notice. This week’s round of new fund launches were all about hedging away those risks and potentially saving investors from the upcoming drop in the markets. For investors, these new products could provide them with the peace of mind needed to get through the next couple of years.
| Ticker | Name | Issuer | Launch Date | ETFdb.com Category | Expense Ratio |
|---|---|---|---|---|---|
| (ERM) | EquityCompass Risk Manager ETF | First Trust | 04/10/2017 | Diversified Portfolio | 0.65% |
| (TERM) | First Trust EquityCompass Tactical Risk Manager ETF | First Trust | 04/10/2017 | Diversified Portfolio | 0.65% |
| (TAIL) | Cambria Tail Risk ETF | Cambria Investments | 04/06/2017 | Diversified Portfolio | 0.59% |
| (XSHQ) | PowerShares S&P SmallCap Quality Portfolio | PowerShares | 04/06/2017 | Small-cap Blend Equities | 0.29% |
| (SPVM) | PowerShares S&P 500 Value With Momentum Portfolio | PowerShares | 04/06/2017 | Large-cap Value Equities | 0.30% |
First Trust Takes an Active Approach
Investment manager First Trust continues to expand its already expansive ETF lineup with two actively managed funds designed to take the risk-on/risk-off issue head-on. The First Trust EquityCompass Risk Manager ETF (ERM) and First Trust EquityCompass Tactical Risk Manager ETF (TERM) both follow a similar strategy of hedging risk.
ERM and TERM will both hold U.S. large-cap stocks during good times and can invest all or a portion of their portfolios in cash, cash equivalents or short-term fixed-income during periods of high volatility or crashes. The idea is that avoiding losses is better than riding through them, as it produces higher returns when the market finally recovers as capital bases are larger.
The major difference between the two new ETFs is that TERM can also go “short” U.S. markets by using futures and other securities. This allows TERM to profit from significant drawdowns and the exposure should give TERM a slight edge over ERM if times get terrible.
The question for investors is just how much risk hedging they want, as both ETFs charge just 0.65% in expenses.
For a full list of all of First Trust smart beta ETFs, check out its issuer page here.
An ETF Veteran Fights Tail-End Risk
Popularizing the idea of multi-asset ETFs, industry veteran Mebane Faber and Cambria Investments is back with its latest ETF, the Cambria Tail Risk ETF (TAIL). As the name implies, TAIL will seek to eliminate risk and reduce the overall loss of a portfolio during market crashes.
The actively managed fund uses a unique strategy to limit overall risk. TAIL will hold cash and U.S. government bonds as its primary holdings. The ETF will then implement a put option strategy on U.S. equities. The idea is that these options – which do include exposure to out-of-the-money puts – provide a hedge against tail risk. They will be more valuable as the market tanks.
In the end, the combination of bonds/cash and these out-of-the-money puts will make TAIL a great ETF when the markets go crazy. However, when the markets aren’t in freefall, the price of the puts will cause TAIL to lose money. This is strictly a hedge against disaster and investors should realize that before they pull the trigger.
Expenses for TAIL run 0.59%, which is not outrageous for an actively managed fund using options.
Check out our Mutual Fund to ETF tool and learn how you can get more bang for your buck when it comes to bear market funds.
PowerShares Expands Its Factor Lineup
Investment manager PowerShares continues to be the smart-beta leader and slices up equity and bond markets further via factors. Its two latest launches use a combination of fundamentals.
The PowerShares S&P SmallCap Quality Portfolio (XSHQ) will seek to provide exposure to “better” small-cap companies. Quality of earnings is one of the main fundamental factors that determine long-term success. XSHQ will screen the broader small-cap-focused S&P 600 for those stocks with the best return on equity, accruals ratios and financial leverage ratio scores. The top 120 small-caps are then weighted and ranked by their scores. XSHQ costs 0.29% in expenses.
The PowerShares S&P 500 Value With Momentum Portfolio (SPVM) seeks to combine both “value” and relative strength factors. By selecting those stocks that are cheap and combining it with those that also have momentum behind them, SPVM hopes to provide a bigger return than that of the broader S&P 500. It’s basically finding those castaway stocks that have been recently refound by investors. Mean reversion is a powerful performance element, and SPVM is designed to capitalize on that fact. The ETF charges 0.30% in expenses for the two factors.
For a list of all new ETF launches, take a look at our ETF Launch Center.
The Bottom Line
Risk is back on the table, and investors are clamoring for solutions to help them fight the potential meltdown. ETF sponsors are happy to help. This week’s round of launches will provide a portfolio with an active way to hedge away some of their overall risks and prevent significant drawdowns.
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