We have felt almost silly writing about low risk funds leading the ranks recently. With central banks around the globe printing at an unprecedented rate, economists say we are in a low tail risk environment, so risk on! Quant has disagreed by mostly favoring the US broad market funds that have lower Red Diamond Risk Ratings and have performed so well in 2013. The various energy funds that have also scored well are the exception but the models have not favored the Japanese funds that have led world markets this year, until today.
It is looking like a red day on those world markets that reminds us to take a look at the risk levels in our portfolios. ETF Globalsm assigns Red Diamond Risk Ratings to all 1,473 exchange traded products and we break them out beyond the overall ratings seen on a product’s tear sheet. Under the Analytics button, the ETFGsm Red Diamond Risk Ratings page lists all those products and their risk broken out into 6 categories. The three categories dealing with price risk are volatility, deviation and country risk where each score represents a quantitative measurement of various industry metrics. Higher scores mean higher risk and all products are cross ranked against the population to get their score. It is the same process with integrity risk that assesses the structure, liquidity and efficiency of a given product. Concentrated funds using swaps with wide bid ask spreads and high expense ratios will raise the score in all three categories which measure other factors as well. The weighting of each category is shown at the bottom of the page and each product’s overall Risk Rating is calculated in the same cross ranked method.
The ETFGsm Red Diamond Risk Ratings are reflective of those attributes and not predictive of future performance. That is why Japanese funds have seen lower risk ratings even though that market is looking at a 7% decline today. Our Green Diamond Reward Ratings have not been favoring those funds and we are feeling better about that today. Time will tell if our market has risen on an improving economy or because of unprecedented Fed liquidity. The mere hint that the Fed’s fat lady is warming up her vocal chords is sending some dancers back to their chairs. You can decide for yourself on the appropriate level of risk for your portfolios, ETF Globalsm is here to help you select those exchange traded products that fit your needs. Please send any questions to firstname.lastname@example.org.