First Trust has partnered up with EquityCompass to help investors achieve long-term capital appreciation in an extended bull market environment through two new actively managed exchange traded funds.
First Trust recently launched the actively managed First Trust EquityCompass Risk Manager ETF (NYSEArca: ERM) and the First Trust EquityCompass Tactical Risk Manager ETF (NYSEArca: TERM). Both come with a 0.65% expense ratio.
The two active ETFs will be managed by Timothy M. McCann, Senior Portfolio Manager at EquityCompass Strategies, and Bernard J. Kavanagh, III, Portfolio Manager at EquityCompass Strategies. The portfolio managers employ an investment strategy that seeks to avoid large, prolonged market losses and diminish volatility.
EquityCompass argues that avoiding the worst drawdowns is meaningfully more beneficial than missing the best up days as severe losses cut future earnings power due to a smaller capital base. Consequently, gains required to recover from a steep loss will be greater than the original loss.
“Following two devastating bear markets in the last 17 years, investors, especially those nearing or in retirement, recognize the vulnerability of equity markets and are seeking risk management solutions. EquityCompass has been successfully utilizing active risk management in our portfolios since 2009,” Richard E. Cripps, CFA, Chief Investment Officer at EquityCompass, said in a note.
Both TERM and ERM focus on U.S.-listed companies. Both will generally hold S&P 100 stocks and the smaller stocks in each of the S&P 500’s 10 sectors. When the U.S. equity market is determined to be unfavorable, the ETFs may invest all or a portion of their portfolio assets in cash, cash equivalents or short-term fixed income.
The major difference between the two options is that TERM may include a significant exposure to securities designed to provide short exposure to U.S. markets during volatile periods when the strategy shifts to cash or cash equivalents, which may help it outperform ERM during pullbacks.
“We believe these ETFs will be useful tools for investment advisors seeking to manage risk in their clients’ portfolios, while maintaining exposure to US equities. As sub-advisor, EquityCompass brings a unique approach to risk-management, supported by years of rigorous empirical research,” Ryan Issakainen, CFA, Senior Vice President, ETF Strategist at First Trust, said in a note.
For more information on new fund products, visit our new ETFs category.