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QuantShares factor ETFs offer solutions to current market conditions


Bill Carey (pictured) is CEO of QuantShares ETFs in Boston, a firm established in 2010 to focus on factor-based ETF investing. Just a little over a year ago, a majority share in the firm was bought by Canadian firm AGF Investments and the result is that the firm has combined quantitative assets of USD5 billion, while the QuantShares ETFs group is responsible for USD1.2 billion.
The combined entity has been rebranded as AGFiQ Asset Management.
Carey explains: “AGF is a global company with significant investment expertise so it’s a great partnership in terms of expanding our scale and research capability and moving more globally.”
The origins of QuantShares lie with the founder, Bill DeRoche, whose background was in managing quantitative investment mandates for large institutions. His idea was to use an ETF structure to bring these investment solutions to a broader set of investors who otherwise wouldn’t have access.
“The vision of the company was how to take that institutional capability and make it more broadly available,” Carey says. The result was that QuantShares became the first ETF issuer to use shorting within an ETF structure for risk mitigation.

“The founders were ahead of their time,” Carey says. “You see now the proliferation of ETFs, from broad index tracking strategies to those designed to isolate sources of return for more efficient portfolio construction – the market has come our way.”

The firm has its own proprietary sets of ETFs in the US under the QuantShares brand and also seven ETFs in the Canadian market also branded as QuantShares.

“People can use them or we can manage strategies for mutual funds or separate accounts strategies for institutions,” Carey says. “What you are finding now again with the proliferation of ETFs is that even institutional investors are using them to achieve exposures versus doing lots of analytics on individual securities. Nowadays in the US, institutions are using ETFs more than the retail audience today.”

New products coming up are focused on a couple of ETFs with strategies that Carey believes suit the current market environment.

“There is a lot of interest today, given where the markets are, in providing some type of downside protection,” he says, with many managers using static cash allocations or trading off the volatility through the VIX volatility index.

“Our approach is different,” Carey says. “We believe in embedding downside protection into a portfolio versus giving investors a timing issue.”

The BTAL ETF aims for low beta by shorting the highest beta stocks using the Russell 1000 and going long equal weighted low beta stocks. Carey says: “If the market is down significantly the high beta stocks get crushed and BTAL works on the inverse. The interesting thing is that BTAL provides a more stable negative correlation – if the market is up 10 per cent then BTAL won’t be down 10 per cent.

“What we are doing is providing hedge fund type returns through an ETF portfolio. We tend to recommend that you use a product like BTAL as a constant allocation in a portfolio.
“The challenge with hedging is it’s impossible to time, Carey believes, and finds it better to use it in the portfolio construction.

“One of the challenges, given where interest rates have gone, is that there is more capital risk in traditional fixed income investing,” he says. “The other phenomenon is investors seeking yield go for high dividend paying stocks but it’s so correlated with market downside risk.”

The second strategy is DIVA which is not a pure market neutral strategy but invests using the Russell 1000 highest and most consistent dividend paying stocks going 100 per cent long by 50 per cent short. “We short out the least paying stocks,” Carey explains. “So it pays a 4 per cent yield but has the risk profile of a corporate bond against the equity market. If you look at investors looking for yield then DIVA is a good option as it is totally uncorrelated to equities and can be used as a constant position in a portfolio rather than a timing perspective.”

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