State Street Global Advisors (SSgA), the second-largest US issuer of exchange traded funds known for its SPDR range of products, recently rolled out an actively managed fund that shifts holdings with the aim of managing risk-on and risk-off investment cycles.
The SPDR SSgA Risk Aware ETF (RORO) is managed by SSgA’s Active Quantitative Equity Group and deploys a proprietary quantitative risk model that at any given time seeks to identify, quantify and benefit from risk factors moving the markets.
Since RORO is actively managed, it doesn’t track any index. Instead, it seeks to outperform the benchmark Russell 3000 Index, a broad index that covers the US equity universe. The fund dynamically shifts allocation based on the current risk profile of the market.
RORO uses a computer-driven algorithm to measure various risk factors such as beta, credit spreads, US dollar strength, gold price and implied volatility (as indicated by option prices). After evaluating these factors, RORO will determine the broad market’s risk appetite and adjust the portfolio’s exposure to large-, mid- and small-cap stocks from the Russell 3000 index accordingly.
Two basic principles are used to adjust the portfolio’s holdings to bring it in-line with the current risk environment. One, change in risk preferences over time can either lead to “flight-to-quality” or a shift into perceived riskier securities. Two, the perception of “risky assets” of market participants’ also varies over time.
During periods of elevated risk appetite, the portfolio’s composition will turn defensive and see more blue-chip and large-cap stocks in the mix. Alternately, exposure in small-cap and growth companies are likely to increase during periods of anticipated low risks.
Mid-cap companies are likely to find a bigger representation during periods of moderate risk and the portfolio is likely to more closely reflect the broader Russell 3000 index.
RORO’s investment strategy and risk control methodology looks similar to hedge funds and retail investors looking for a portfolio diversifier may consider this option. It could potentially reduce a portfolio’s volatility and mitigate drawdowns when markets suffer rapid declines.
The fund has an annual expense ratio of 0.5 percent.
Disclosure: No holdings