Reduce Risk, Add Diversity With ETFs

Many adviors and investors are constantly trying to limit risk and improve diversity within their portfolios. Understanding how any security, including exchange traded funds, fits into a portfolio’s landscape, is integral in the risk reduction and diversity enhancement process.

Some ETF strategists are offering new ways to accomplish both risk reduction and increased diversification, including San Francisco-based Lattice Strategies.

Lattice “offers a series of portfolios called Risk-Optimized Core (ROC) that combine traditional equity, fixed income and commodity ETFs with liquid alternative mutual funds. Each ROC portfolio provides exposure to what Lattice describes as enterprise assets (such as US equities and developed Europe equities); real assets (such as commodities and real estate); yield assets (such as high yield and emerging market bonds); market hedge assets (such as U.S. Treasuries and investment grade bonds) with liquid absolute return (such as fixed income absolute return); and liquid hedged strategies (such as long/short equity),” said S&P Capital IQ in a new research note.

Lattice’s ROC 70 is designed to incur volatility and have value at risk below 70% of its benchmark, according to S&P Capital IQ. The strategist uses bottom-up and top-down analysis in building its portfolios, which include positions in some of the largest U.S. and Europe-focused ETFs.

According to S&P Capital IQ, Lattice’s ROC 70 recently held positions in the SPDR S&P 500 ETF (NYSEArca: SPY), the world’s largest ETF, and the Vanguard FTSE Europe ETF (NYSEArca: VGK) at the end of the second quarter. [Super Value ETFs]

VGK, rated overweight by S&P Capital IQ, has hauled in $2.66 billion in new assets this year after bringing in $6.86 billion last year. The fund has been bolstered by its conservative country posture, which has allowed risk-averse investors to gain exposure to European without large weights to peripheral Europe. The U.K. and Switzerland combine for almost 46% of VGK’s weight. [More Upside for Europe ETFs]

The Lattice ROC 70 strategy also recently had a position in the iShares MSCI Pacific ex Japan ETF (NYSEArca: EPP), according to S&P Capital IQ. The research rates the $3 billion EPP overweight.