A new ETF issuer in the US, Arch Indices, has built its first offering around a dynamic portfolio construction which is designed to maximise income and minimise volatility.
The Arch Indices VOI Absolute Income ETF (VWI) is the brainchild of co-founders Yang Tang and Dr Jinghua Kuang, who have 40 years of combined experience in fixed income and derivatives.
Tang describes Kuang as more ‘old school’ and himself as ‘more of an MBA type’. The pair were on a desk together at Citi and discussed building an optimal portfolio – Kuang’s wife is a financial adviser.
“Bond indices weren’t great, no one thought multi asset through properly and then, during Covid, people were betting on meme stocks and crypto,” Tang says. “Our whole mission is to build optimised portfolios and last August we made that a reality as we took the plunge to see what we could do and then launched our first ETF in October.”
The ETF route appealed to Tang as it is proving to be an exciting space. “Traditionally, people thought the ETF was a low-cost beta replication product, a bit boring, and largely a function of what indices were meant to be, but it was easy to access and had tax efficiencies so people are voting with their feet. There are now many more ideas in the ETF wrapper.”
The pair had the goal of building a product that maximises income and minimises volatility. It does this through a portfolio which consists of weighted dividend stocks and fixed income ETFs.
To be eligible for inclusion in the index, equity securities must have a minimum market cap of USD2 billion, minimum daily average trading volume, minimum 3 per cent dividend yield, and a five-year track record of regular dividend payments. Bond ETFs are chosen based on a range of factors, including their historical correlation to equities (providing key volatility reduction). All eligible securities are then weighted using the VOI methodology, first by sector into sub-indices and again using the VOI approach into the main index. The ETF is optimised for income and seeks to benefit from the capital appreciation potential of quality dividend paying stocks.
The current index portfolio yield is 6.5 per cent.
Interest has been strong, Tang says. “This product is timely because it is transparent and is different from what is in the marketplace.”
It’s aimed at retirees who are doing their own portfolio management and seeking income, and financial advisers and RIAs who want an income portfolio for their income-oriented clients. The product can also be customised for the institutional space.
