New ETF Offers Risk-On, Risk-Off Protection

Not all forms of market risk make themselves readily apparent. Of course, there are times when investors want to ratchet up risk. A new exchange traded funds aims to solve both conundrums.

The actively managed SPDR SSGA Risk Aware ETF (NYSEArca: RORO) debuted today with the objective of helping to “identify, quantify and benefit from risk factors moving the markets at any given time,” according to a statement issued by State Street Global Advisors, the second-largest U.S. ETF issuer.

RORO’s underlying quantitative model uses beta, size, credit risk, credit spreads, gold price, US dollar exchange rates and implied volatility as factors in its evaluation process. When market risk is expected to be elevated, the model shifts to a defensive posture and when risk-taking is in style, the ETF can increase its exposure to growth and small-cap stocks.

RORO “uses a quantitative market risk measurement model to construct an active portfolio of US equity securities that seeks to properly align the portfolio’s risk with the current risk environment. This strategy rests on two basic principles: 1) fluctuations in aggregate risk preferences can lead to a flight-to-quality or a rotation into perceived risky securities and 2) what market participants perceive as “risky” varies over time,” according to State Street.

The new ETF can draw any security from the Russell 3000 index while its tilts toward various factors, such as size, quality, growth and others, can shift depending on market environment.