The Challenges
After years of studying new product launches, one thing that we have come to understand is that Advisors face unique challenges when selecting their equity exposure; such as from which market should the beta be derived? and what’s the best way to achieve it?
After years of studying new product launches, one thing that we have come to understand is that Advisors face unique challenges when selecting their equity exposure; such as from which market should the beta be derived? and what’s the best way to achieve it?
Not all markets are created equal, leading to a huge
disparity between market returns. ETPs
have made it easier to pick and choose among different Beta sources, but most investors
don’t have the time or acumen to forecast domestic returns or to determine whether
Developed or Emerging Markets will have the better future risk-adjusted
returns.
The Portfolio+ Solution
Regular readers of our “New-to-Market” posts may already
be familiar with Portfolio+, Sponsor of six “lightly levered” funds that offer
1.25x leverage to a wide range of the most common investment benchmarks
including Domestic Equities, Emerging Markets, Developed International and the Barclays U.S. AGG. First launched in 2015 under the Direxion
label, the series intended to take levered funds, long-known as a tool only for
traders, and transform them into long-term holdings vehicles for investors who
were already turning to Smart Beta funds to help magnify their equity
exposure. Thanks to the lower leverage
target and smaller fees, the Portfolio+ funds have managed to deliver on their
return goals and often with less volatility than Smart Beta funds.
Grounded in modern portfolio theory, the Portfolio+ All
Equity Model combines the best of both firms to provide the Advisor a solution
to those aforementioned challenges. The
ETF Global Quant-based Research, Selection and Portfolio Allocation processes optimize
the balance between risk and reward within the Portfolio+ ETFs. With 100% Equity, the program is strategic in
nature, offering enhanced (i.e., lightly levered) exposure to a blend of Domestic,
International and Emerging Market equities while tactically adjusting the
allocation mix and retaining a high correlation to the MSCI ACWI. Recognizing that one of the greatest
drawbacks of any model strategy is fee layering, ETFG does not charge a
management fee.
So how exactly is
it “Powered by ETF Global?”
Our firm has long been known as a leading independent,
ETF Research and Data provider anchored by our flagship ETF Global Quant Model,
a dynamic quantitative ETF rating and ranking system. We rank all unlevered equity funds with at
least a twelve-month track record using over 100 daily inputs to arrive at our
Green Diamond Reward Scores. The Green
Diamond Reward Score combines Behavioral Finance with both Technical &
Fundamental Analyses to provide forward-looking guidance on the attractiveness
of funds. The Red Diamond Risk Scores
perform a similar process to address the risk quotient for all ETFs including
levered and inverse that have been trading for at least 3 months. As mentioned, the ETF Global Quant Model and ETFG
Green Diamond Reward Scores drive the selection process to optimize the balance
between risk and reward within the Portfolio+ All Equity Model.
The Program
Our goal in creating the Portfolio+ All Equity Model was
to build a simple and straightforward strategy, offering broad exposure to Domestic
and International equities with magnified returns without the complications of Smart
Beta strategies.
What makes the Portfolio+ All Equity Model so dynamic is
that not only will it adjust its exposure to Domestic, International and Emerging
Markets, but it will also shift its domestic portfolio between Small, Mid and Large
Cap funds to help position investors in the most attractive section of the
style box. Each day, the ETFG Green
Diamond Ranking system drives proprietary algorithms in 25 underlying factors blending
Fundamental & Technical Analyses along with Behavioral Finance metrics delivered
in an easy-to-follow 1-10 scale for least attractive to most attractive.
While the model itself will be reconstituted on the first
Monday of every quarter, the real work begins on the preceding Friday when the
Green Diamond rankings are analyzed after market close. Because our Green Diamond ranks exclude
levered products, the model will determine the allocation by comparing the
scores of unlevered funds to stand in for the Portfolio+ suite of products. These unlevered funds share the same
reference index as their Portfolio+ ETF counterpart, making them ideally suited
to help.
Unlevered Reference Fund
|
Ticker
|
Portfolio+ Fund
|
Ticker
|
SPDR S&P 500
|
SPY
|
Portfolio+ S&P 500
|
PPLC
|
iShares S&P Midcap
|
IJH
|
Portfolio+ S&P Mid Cap
|
PPMC
|
iShares S&P Small Cap
|
IJR
|
Portfolio+ S&P Small Cap
|
PPSC
|
Vanguard FTSE Developed Market
|
VEA
|
Portfolio+ Developed Markets
|
PPDM
|
Vanguard FTSE Emerging Market
|
VWO
|
Portfolio+ Emerging Markets
|
PPEM
|
Starting with the Domestic portfolio, the fund whose
reference fund has the highest Green Diamond score will be put in the first
position with 50% of the portfolio while the second and third ranked funds will
each receive 25% of the allocation. For
example, if SPY ends the quarter with the highest ranking, the Portfolio+
S&P 500 ETF (PPLC) will have 50% of the domestic allocation with the other
two funds splitting the remainder.
The domestic allocation is just step one in the process. Next comes determining the overall balance of domestic, developed international
and emerging market equity exposure - their portfolio weights are
selected using a different system than the domestic portfolio. While ETFG will once again compare the Green
Diamond scores of the reference funds (with the highest scoring domestic fund
being used to calculate the percentage allocated to domestic funds), we believe
that most Advisors would be extremely uncomfortable with emerging market
exposure approaching anything like the 25% minimum weight we use for the
domestic allocation.
The emerging markets allocation is capped at 10% even
with the highest score while domestic would get 50% allocation and
international developed would be 40%. Or
if domestic stocks had the highest ranking, they would get 60% of the allocation
while emerging markets would have 5% and international developed would get
35%. Our expectation is that over time,
the macro breakdown will be in-line with that of the ACWI while still offering
the possibility of outperformance both through the rotation within the domestic
portfolio, adjustments to the macro mix and through the use of lightly levered
funds.
Accessing the
Program
The Portfolio+ All Equity Model Portfolio will join the
Powered by ETF Global® suite of ETF Model Portfolio Programs offered directly
from ETF Global and will be introduced to those TAMP
platforms, such as SmartX and Vestmark, on which the ETF Global Dynamic Model Portfolio Programs are currently
available.
For more information about the Portfolio+ All Equity
Model Portfolio, please contact us at (212) 223-3834 or support@etfg.com
Thank you for reading ETF Global Perspectives!
_____________________________________________________________
Assumptions,
opinions and estimates constitute our judgment as of the date of this material
and are subject to change without notice.
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