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.
“The SPDR SSGA Risk Aware ETF is targeted at providing investors an innovative solution for capitalizing on risk-on and risk-off fluctuations in the US equity market,” said Scott Ebner, senior managing director and global head of product development and research at State Street Global Advisors, in the statement. “Active quant strategies have been a core competency of SSGA’s institutional asset management and mutual fund businesses for decades, and RORO is the first active equity ETF managed by this SSGA investment team.”
The new ETF charges 0.5% per year.
Last week, actively managed ETFs eclipsed the $18 billion in combined assets management mark for the first time, according to AdvisorShares data.
Increased demand for actively managed ETFs and the potential for a more favorable regulatory environment could make actively managed ETFs a $500 billion asset class by 2020, according to a new report by SEI Investments. [Rapid Growth Seen for Actively Managed ETFs]
ETF Trends editorial team contributed to this post.