We have written extensively about the average Red Diamond Risk Rating of the top 10 funds recently coming in below 4. That number is now at a still low 4.2 as growth and small cap funds comprise more of today’s elite ranks. The lowest Risk Rating among the top 10 is 3.19 and belongs to the Powershares Buyback Achievers Fund (PKW). You can read more about the fund in our March 6th post but today we will use it to explain how our Risk Ratings are compiled. Under the Analytics button the first selection is the ETFGsm Red Diamond Risk Rating page listing our various risk scores for all exchange traded products.
You will notice the highest Risk Ratings skew towards the leveraged and inverse products but we can focus on PKW by entering its ticker in the search box above the sortable headers. Now we see its 3.19 Risk Rating highlighted in Red with its six sub categories to the right (their weightings are at the bottom). Each of these sub scores is a proprietary compilation of various industry standard metrics. PKW’s 3.3 Volatility score includes our ETFGsm Implied Volatility measure in addition to other metrics to help differentiate good and bad volatility because we don’t want to penalize good performance. Similar thoughts drive our Deviation score which also includes various industry metrics. Country risk comes out of our Quant model and is an example of how our Diamond Ratings differentiate metrics that Quant integrates. Structure is another of those Quality metrics from Quant that become part of the Red Diamond Risk calculation. It looks at the diversification and average weights within a fund, its use of derivatives and its sponsoring firm. Liquidity also borrows from Quant where we look at bid/ask spreads and average volume but we add a measure for inclusion on the ETFGsm Liquidation Watch List which warns of the ultimate liquidity event. Finally, our Efficiency score addresses tracking error and expense ratios.
Investors not only consider the return an ETF may provide but also the risk they undertake in holding it. Our Green Diamond Reward Ratings have done an excellent job predicting those funds that have performed best but our Red Diamond Risk Ratings are merely reflective of a given product’s historical attributes. They are compiled and change daily although they tend to be more durable than the Reward Ratings which change with the market’s winds. If you think the market has more to run you might want to look for higher volatility products which is a reason why we break out the sub scores. ETFGsm doesn't tell you what to do, we give you easy to use tools to make better decisions for yourself.