Managed Risk


DeltaShares brings insurance industry type “managed risk” to EM

A new line of ETFs is coming to market that offers insurance-like strategies for retail investors. As part of that, TransAmerica-backed DeltaShares is listing a “new managed risk” ETF for emerging markets. The DeltaShares S&P Emerging Markets Managed Risk ETF (DMRE) will track a highly sophisticated set of indexes from S&P.

DMRE has three indexes: an equity index, a fixed income index, and a cash index. DMRE then “manages risk” by jumping between the three indexes, depending how volatile they are. It then uses a synthetic put option to tone down the risk of the equity and fixed income indexes even more.

While the indices are complex, the investment objective is simple: bag the upside of the equity market, while only getting the downside of bonds and cash when volatility shoots up.

The fund will charge 0.60%.

Analysis – will they work?

The question for today’s “managed risk” listing is: will it actually manage any risk?

This may sound rude, but we have good reason for asking. We ran simulations on every “managed risk” ETF by DeltaShares, comparing their past performance to their plain vanilla benchmarks. In almost every case, we found that they took on more risk (standard deviations, drawdowns) and underperformed. DMRI, the Europe and Asia Pacific fund, appears to be an exception – although it is hard to tell how much of its outperformance comes from excluding Korea. (DMRI tracks a boutique index from S&P that excludes Korea, there is no obvious plain vanilla pairing to compare it to).

The underperformance has even occurred the past 3 months, as volatility picked up.


PGIM international multifactor

Prudential-owned PGIM is listing another actively managed multi-factor ETF, this time targeting equities from every country except the US. The PGIM QMA Strategic Alpha International Equity ETF (PQIN) will be actively managed by PGIM’s quant team, and target value, quality and low volatility, and use their proprietary algorithm to guide their stock picking.

While the fund can invest in anything non-US, PQIN is benchmarked against the MSCI EAFE index, which it will attempt to outperform.


DWS is adding another arrow to its ESG quiver, listing a merging markets tracker via an MSCI index. The Xtrackers MSCI Emerging Markets ESG Leaders Equity ETF (EMSG) will track the plainly titled MSCI Emerging Markets ESG Leaders Index. From what we can tell, Russell Investments in Ireland has a fund tracking the same index under its Old Mutual sub-brand.

The ESG screen used by the index weeds out companies whose main businesses are in alcohol, tobacco, gambling, nuclear power, conventional and controversial weapons. It then rates companies based on how good and bad they are. Companies that fall too low in MSCI’s ESG rating are booted from the index. As of July 2018 there were 402 companies in the index. The fund is rebalanced quarterly and will charge 0.20%.