Geopolitics, train derailments, inflation, the Fed … egg prices? There are more than a few big headlines telling investors to watch out for a bumpy ride this year. With all that risk comes stress, but risk shouldn’t just be a source of anxiety — it can also be a place to find the “risk premium.” Getting returns for investor risk, or risk premia, is the focus of the Franklin Systematic Style Premia ETF (FLSP ), a strategy to watch in an uncertain environment.
Why might watching for risk premia specifically make sense? For one thing, despite the looming threat of a hard landing caused by one too many Fed rate hikes, the global growth and inflation mix, as well as positive news from abroad in Europe and in China, has reset the risk landscape. While there remains the potential for equity investors to be disappointed, there are equity segments that have come back into play this year that merit attention.
The risk premium, or the extra return above the risk-free rate investors receive for investing in risky assets, includes five main risks: business risk, financial risk, liquidity risk, exchange-rate risk, and country-specific risk. So how does a systematic ETF like FLSP approach finding returns amid such varied and layered challenges?
FLSP takes an active approach and embraces two strategies — in the first, the managers focus on value, momentum, and carry to help make bullish, or bearish, bets on stocks, bonds, commodities, and currencies. In the second strategy, managers swap carry for quality on top of momentum and value as they look to take long or short positions in a given stock or index.
That’s helped the ETF see a notable uptick in returns over the last week, returning 125 basis points more over the last week than it had YTD. Taking in $4.2 million over the last month, the ETF charges 65 basis points, and hit its three-year mark this past December. Navigating risk is one of the key challenges in investing, but with two different strategies and a specific mandate to look for risk premia, FLSP could be an intriguing systematic ETF to track.
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