Source: Photo

Introduction

My last article discussed Transamerica’s LargeCap risk-managed ETF (Article). They also launched ones for other asset classes. While all investors have some level of risk aversion, as a retired investor, the desire to control risk has led me to explore funds designed to minimize that aspect of one’s portfolio. Of course, the primary method of managing risk is with one’s asset allocation. In pre-2008 days, that probably meant buying 5% five-year CDS. That option today means earning below inflation returns; not a viable choice for any decent percent of an investor’s assets.

Risk-managed funds need to be viewed through a pair of ROI-Risk glasses. How much trade-off between the two is each investor willing/desiring to take/endure should be the focus when reviewing these ETFs. To help readers out, I will also chart an Invesco Low-Volatility ETF and a weighted EQ/FI portfolio for each to see how the risk-managed and the others’ statistics compare. When reviewing the statistics keep in mind risk-managed and low-volatility strategies have very different approaches to how to achieve lower risk. To be clear, the risk both are concerned with is negative price movements as occurred last spring.

Measuring Risk

Every investment has risk, even “risk free” treasuries (inflation). It is important to know those risks and properly measure them. For investments, some very smart PHDs have developed mathematical models to help us out in this arena. Some have less math involved but all provide insight into an investment’s risk profile. My analysis will include the following measurements, all pulled from PortfolioVisualizer.com. All definitions are from investopedia.com

Standard Deviation: a statistic that measures the dispersion of a dataset relative to its mean and is calculated as the square root of the variance. The standard deviation is calculated as the square root of variance by determining each data point’s deviation relative to the mean.

Sharpe Ratio: used to help investors understand the return of an investment compared to its risk. The ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk. Volatility is a measure of the price fluctuations of an asset or portfolio.

Sortino Ratio: differentiates harmful volatility from total overall volatility by using the asset’s standard deviation of negative portfolio returns.

Maximum Drawdown: the maximum observed loss from a peak to a trough of a portfolio, before a new peak is attained. Maximum drawdown is an indicator of downside risk over a specified time period.

Risk Managed ETFs to analyze

DMRM: DeltaShares S&P 400 Managed Risk ETF

Transamerica ETF Trust – DeltaShares S&P 400 Managed Risk ETF is an exchange traded fund launched and managed by Transamerica Asset Management, Inc. The fund is co-managed by Milliman Financial Risk Management LLC. It invests in public equity and fixed income markets of the United States. For its equity portion, the fund invests in stocks of companies operating across diversified sectors. It invests in stocks of mid-cap companies. For its fixed income portion, the fund invests in 5-year U.S. Treasury note or bond and U.S. Treasury bills maturing in 0 to 3 months. It seeks to replicate the performance of the S&P 400 Managed Risk 2.0 Index, by investing in securities as per their weightings in the index.

Source: Seeking Alpha modified

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Basic statistics: $88m AUM – .45% Expense ratio – .79% Yield – Inception 7/17

DeltaShares S&P 400 Managed Risk ETF

Source: Seeking Alpha

You will notice that all four ETFs follow the basic same portfolio allocation: a large percent in US Govt debt and the stocks of the underlying equity index held via option exposure for the MC & SC ETFs and directly for the INTL & EM ETFs. They may also hold synthetic Put options based on the underlying index.

www.spglobal.com

Source: www.spglobal.com

All the ETFs are also based on an underlying index with much longer history and those charts are included. As above, each shows the risk-managed ETF’s performance trails that of the pure index of the same asset class. This would be expected.

www.portfoliovisualizer.com

Source: Portfolio Visualizer

Based on all four risk measurements mentioned, the MDY/VCSH portfolio performed the best using the same asset allocation as DMRM.

DMRS: DeltaShares S&P 600 Managed Risk ETF

Transamerica ETF Trust – DeltaShares S&P 600 Managed Risk ETF is an exchange traded fund launched and managed by Transamerica Asset Management, Inc. The fund is co-managed by Milliman Financial Risk Management LLC. It invests in public equity and fixed income markets of the United States. For the equity portion, the fund invests in stocks of companies operating across diversified sectors. It invests in stocks of small-cap companies. For its fixed income portion, the fund invests in most recently issued 5-year U.S. Treasury note or bonds and in U.S. Treasury bills maturing in 0 to 3 months. It seeks to replicate the performance of the S&P 600 Managed Risk 2.0 Index.

Source: Seeking Alpha modified

Basic statistics: $33m AUM .45% – Expense ratio – .74% Yield – 7/17 Inception

Source: Seeking Alpha

DMRS uses a higher level of USTs than its MC cousin, 70%. Also like the MC ETF, an investor sacrifices return, in this case almost 40%! If the sole goal was a lower StdDev, DMRS did provide that, 13.5% versus 23.1%, but there is a better choice.

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DeltaShares S&P 600 Managed Risk ETF

Source: www.spglobal.com

Source: Portfolio Visualizer

This chart emphasises the importance of knowing what strategy the focused ETF investment uses. Notice the Low-Volatility ETF was the top performer going into 2020 but has not rallied with the market. Again, like in the MC arena, building a portfolio using the standard ETF and the ST Corporate bond ETF provides the best results.

DMRI: DeltaShares S&P International Managed Risk ETF

Transamerica ETF Trust – DeltaShares S&P International Managed Risk ETF is an exchange traded fund launched and managed by Transamerica Asset Management, Inc. The fund is co-managed by Milliman Financial Risk Management LLC. It invests in public equity markets of developed countries within the Europe and Asia Pacific regions, excluding Korea and fixed income markets of the United States. For its equity portion, the fund invests in stocks of companies operating across diversified sectors. It invests in stocks of large-cap and mid-cap companies. For its fixed income portion, the fund invests in 5-year U.S. Treasury note or bond and U.S. Treasury bills maturing in 0 to 3 months. It seeks to replicate the performance of the S&P EPAC Ex. Korea LargeMidCap Managed Risk 2.0 Index.

Source: Seeking Alpha modified

Basic statistics: $162m AUM – .50% Expense ratio – 1.92% Yield – 7/17 Inception

Source: Seeking Alpha

DMRI allocates just 35% to its fixed income allocation. Unlike the domestic ETFs, DMRI holds the actual securities. DMRI returned just 50% of the return of the S&P Intl index I used to compare it against.

Source: www.spglobal.com

DeltaShares S&P International Managed Risk ETF

Source: Portfolio Visualizer

Once again, the self-made portfolio turns in the best results. Neither DMRI nor IDLV has recovered as much as EEM or the balanced portfolio.

DMRE: DeltaShares S&P Emerging Plus Managed Risk ETF

Transamerica ETF Trust – DeltaShares S&P EM 100 & Managed Risk ETF is an exchange traded fund launched and managed by Transamerica Asset Management, Inc. The fund is co-managed by Milliman Financial Risk Management LLC. It invests in public equity markets of emerging countries across the globe and fixed income markets of the United States. For its equity portion, the fund invests in stocks of companies operating across diversified sectors. It invests in growth and value stocks of companies across diversified market capitalization. For its fixed income portion, the fund invests in 5-year U.S. Treasury note or bond and U.S. Treasury bills maturing in 0 to 3 months. It seeks to replicate the performance of the S&P EM 100 Managed Risk 2.0 Index.

Source: Seeking Alpha modified

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Basic statistics: $45m AUM – .60% Expense ratio – .37% Yield – 3/19 Inception

DeltaShares S&P Emerging Plus Managed Risk ETF

Source: Seeking Alpha

DMRE allocated 31% to Fixed Income and only holds 121 equity assets, the smallest set of equities of the four risk-managed ETFs. Here they own the actual security or its ADR/GDR equivalent.

Source: www.spglobal.com

DMRE performs the worst of all the ETFs covered against their asset class standard index in terms of return.

Source: Portfolio Visualizer

Making it a clean sweep, the portfolio of EM/Cash ETFs provided the best ROI/Risk combination based on the risk measurements used.

Portfolio Strategy

portfolio_risk_management_and_suitability_powerpoint_presentation_slides_Slide03

Source: Photo

As the above chart outlines, there are multiple steps an investor should go through in the management of their portfolios. The selected strategy for taxable, tax-advantage with RMDs and those without could be different. As a retired investor, I have chosen to not use risk-managed or low-volatility funds in my taxable accounts and mostly use them in our IRAs requiring RMDs. One reason for that is our cash flow currently is adequate to meet our expenses but I don’t want to have to sell during a market dip to meet any RMD.

In analyzing the four ETFs covered here, it is important to note their short history, with DMRE being barely 20 months old. Also, their performance would be much better if their fixed income component was earning more than fractional pennies on the dollar. I believe it is also possible to save fund expenses using a standard ETFs for both parts versus these risk-managed ETFs, which is one reason why I gave each a Neutral rating. The second reason is, like for DMRL, there are better options. None of these choices would meet the needs of an investor looking for income generation.

With any index-based ETF, study the index to know what “bets” you are taking versus the standard index for that strategy. ETFRC.com has a tool that compares holdings between two ETFs.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



Via SeekingAlpha.com