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Blue sky thinking for new ETF range


David Varadi (pictured), CFA, Director of Research, Blue Sky Asset Management, answers questions on his firm’s new range of ETFs.

Tell me the thinking behind the launch of these ETFs?

Our ETFs were designed to help investors create portfolios with different goals or objectives such as Growth, Income, Real Returns (returns linked to inflation) or Total Returns. They also serve as substitutes for different desired exposures such as Equity, Fixed Income, Commodity/Natural Resources, and Alternatives. Each fund performs well in different environments and the unique value proposition is the ability to create a total portfolio solution for investors with a specific goal by using them in combination.  These strategies have been vetted through our managed accounts over the years and the ETF structure allows for more efficient execution and tax management.
The distinctive feature for our funds is that they all have built-in risk management. You can get equity exposure by buying the S&P500 ETF (SPY) but this also means that you are going to have larger drawdowns. Investors need to invest in riskier assets in this low-interest rate environment but cannot afford to have large drawdowns like in 2008. Diversification can help lower risk but still tends to be a poor buffer for the worst bear markets, and most importantly will lower returns over a pure equity mandate.  In contrast, our Risk Managed Family of funds have a built-in risk management overlay which attempts to reduce these large drawdowns by having the flexibility to increase holdings in cash and fixed income exposure during prolonged market declines. This provides the ability for investors to participate in the underlying asset class performance (such as equities) with a smoother ride.  
Another layer to our approach is that we are both macro AND micro focused. We want risk management but we want to have enhanced security selection as well. Our Dynamic Beta Family of funds are a new type of smart beta product that is designed to provide constant exposure (100% fully invested) to an asset class with enhanced returns relative to risk. They are unique in that they use forward-looking market indicators from equity options in order to assess upside versus downside for a particular stock.  They are designed to be held by our Risk Managed funds in order to provide enhanced security selection and ideally higher returns than their respective benchmarks. When used in combination we strive to create more optimal portfolios for investors.

Who are they aimed at?

The funds are aimed at advisors and sophisticated individual investors that seek to have a set of tools to create their desired portfolio solution or wish to enhance their existing portfolio.

What do they achieve that other ETFs don't?

Most ETFs do not have a risk management feature – they give you exposure to a country or an industry but with a constant beta, for better or for worse. We try to provide participation with downside protection in our Risk Managed Family of funds. We also try to offer smarter risk exposure to countries or industries via our Dynamic Beta Family of funds.
Do they inherently carry more risk than other ETFs?

We believe that they carry less risk than their comparable exposures and this is by design. While we can’t manage the risk of a one-day decline or a sudden and sharp correction (nobody can), we believe that we can reduce the risk of a 20 per cent or greater decline that often happens during bear markets.

How much money does QuantX manage in ETFs at the moment and what are the expectations for the new range of ETFs?

We have approximately USD170 million in AUM across our ETFs, and we expect that this will grow over time with greater adoption from our current network of advisors that we service. We believe we are at the forefront of a trend in RIAs moving their clients’ money from an SMA structure to a more flexible and efficient ETF structure. We hope that over time we can attract more advisors to use our range of products.

Are there any liquidity issues with these ETFs?

Liquidity is a common misconception that investors have when looking at ETFs. Whenever investors see an ETF that has not traded very much on a given day they often assume that this security is illiquid or difficult to trade. But the difference between stocks and ETFs is that ETF liquidity is driven off the liquidity of the underlying securities, not quoted volume. Since many of our funds hold highly liquid funds such as the S&P500/SPY or MSCI EAFE/EFA, this means that our true liquidity is actually quite high. Furthermore, our ETFs have the ability to issue new shares and therefore can create liquidity when there is demand. Authorised participants are instrumental in facilitating this process. All that said, we do anticipate the secondary market volume to be lower than other trading vehicles, since our ETFs are intended to be Buy & Hold allocations.  

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