Wednesday, October 16, 2013

High Anxiety

Yesterday brought additional anxieties to the markets that further knocked down some of the short-term Treasury prices and brought those yields to their highest level in five years.  Along with the downward pressure on prices came Fitch’s warning that placed the United States’ triple-A rating on “rating watch negative” with a potential downgrade possible for early next year.

We all hope for immediate and constructive resolutions to these and some of the other looming big impact issues out there, but in the meantime, junctures like this one warrant keeping an updated understanding of the risk inherent in our respective portfolios.

For those that hold Exchange-Traded-Funds, our Red Diamond Risk Ratings are meant to do just that.  The ETFG Red Diamond Risk Ratings measure two primary risk categories:  Price Risk and Integrity Risk.  Price and Integrity risk are equally weighted in the overall risk rating. 

Price Risk calculates 7 equally weighted underlying measurements covering such aspects as volatility and deviation. Integrity Risk calculates 8 equally weighted underlying measurements regarding the structure and trading characteristics of the security and the quality of its sponsor. 

The Overall Risk Rating Score is aggregated and carried to two decimal places to generate the ETFG Red Diamond Risk Rating.  A 1 Red Diamond Risk Rating represents the ETFs with the lowest risk ratings and a 10 Red Diamond Risk Rating represent the ETFs with the highest risk rating.

The summary page for the ETFG Risk Ratings ranks all outstanding ETPs, including levered and inverse, by both their overall risk scores as well as each underlying category.  As you would imagine, the highest Risk Ratings approach a 10 with levered products such as:  INDL, LBJ and GASL.

The search box allows for a quick look-up of any ETP of interest.  Of course, you can also access the Red Diamond Risk Ratings for individual ETPs via their ETFG Tearsheet.  Lastly, for more background on the calculation method and underlying components of the overall ETFG Risk Scores, please take a look a About ETFG Risk and Reward Ratings.

Thank you for reading ETFG Daily Perspectives.

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