To capitalize on the fast-growing smart beta segment of the ETF industry, Transamerica Asset Management, Inc. last month launched DeltaShares by Transamerica with a suite of strategic beta ETFs.
The DeltaShares suite includes four ETFs designed to provide core equity strategies with an embedded risk-management feature. DeltaShares by Transamerica are the first and only suite of ETFs that track the S&P Managed Risk 2.0 Index Series so that investors can track the performance of a given segment of the equity market while seeking to control volatility.
ETF Trends recently caught up with Tom Wald, Chief Investment Officer, Transamerica Asset Management, and Vinit Srivastava, Head of Strategy and ESG Indices, S&P Dow Jones Indices, to discuss the launch.
Tom Lydon: Congratulations on the launch of DeltaShares. Tell us about this new family of ETFs?
Tom Wald: Thank you, Tom. DeltaShares is seeking to provide a real and meaningful solution to investors that, to date, we feel has yet to be provided in the ETF market. With the DeltaShares Managed Risk ETF series, we are aiming to help investors participate in the capital appreciation equities offer in rising markets in order to help meet financial goals and fund liabilities, while potentially minimizing the impact of prolonged and sustained down markets. Through seeking the optimal combination of equities, treasury bonds and cash, DeltaShares Managed Risk ETFs will strive to provide investors with the most efficient portfolio of these asset classes for a given market environment, based on current stock volatility trends. By doing so, we believe we are enhancing the traditional relationship between long-term risk and reward. What we’re doing with the DeltaShares Managed Risk ETF series is bringing institutional-quality, rules-based managed risk investing strategies to the ETF market and to everyone who utilizes ETFs, both individually and institutionally. Obviously, we are quite excited to bring the DeltaShares brand and this first Managed Risk ETF series to market.
Tom Lydon: What DeltaShares ETFs are launching first?
Tom Wald: To start, we’ve launched four Managed Risk ETFs. Three are U.S.-based large, mid and small cap stocks and one is international. They are the DeltaShares S&P 500 Managed Risk ETF (DMRL); DeltaShares S&P 400 Managed Risk ETF (DMRM); DeltaShares S&P 600 Managed Risk ETF (DMRS); and DeltaShares S&P International Managed Risk ETF (DMRI). The DeltaShares Managed Risk ETFs track a series of indices created by Vinit’s team at S&P Dow Jones Indices, the S&P Managed Risk 2.0 Indices.
Tom Lydon: What was the inspiration for DeltaShares?
Tom Wald: Transamerica had considered entering the ETF space in the past, however, we didn’t want to be just another “me too” competitor. We had established some hard criteria we thought needed to be met before entering. The first was we wanted to provide an unmet investor need that would differentiate us from existing products. The second was we wanted to partner with a highly skilled sub-adviser with a proven history and knowledge in such a strategy. The third was we also wanted to partner with an industry-leading index provider. Finally, we wanted a solution that we were seeking to be truly unique but at the same time easily understandable and appreciated by those who will ultimately own the ETFs. We believe DeltaShares met all of these criteria.
With our Managed Risk ETF series, we were seeking to build solutions that may help clients grow their assets yet systematically potentially stabilize portfolios during times of market stress. The broad vision of the DeltaShares Managed Risk ETF series as a risk-managed solution is consistent with Transamerica’s focus on creating potentially better outcomes for retirees, institutions and individual investors. DeltaShares Managed Risk ETFs employ risk management best practices honed by our partner and sub-adviser Milliman Financial Risk Management, packaged into a rules-based format by S&P Dow Jones Indices. We’re looking to deliver a sophisticated risk management approach to equity investing, however one whose overall investment premise is actually quite simple.
Tom Lydon: What is managed risk investing and what are its origins?
Tom Wald: Managed risk investing seeks to reduce overall portfolio risk when risk in the market appears as though it is increasing. Higher levels of realized volatility in equity markets have historically been associated with larger declines in stock prices. These times of higher market volatility can negatively impact investor portfolios and create stress for investors. Managed risk investing was first adopted by insurers seeking to manage liabilities, particularly life insurers for their variable annuity portfolios, but it really caught on with a broader set of investors in the wake of and during the global financial crisis.
Vinit Srivastava: A managed risk strategy, as proxied by S&P’s Managed Risk 2.0 Indices will seek to decrease equity market exposure – while reallocating to less risky assets – as portfolio volatility increases to predetermined levels. While this means not participating fully in select directionally positive days for equities, in the past the strategy has proved to be beneficial by losing less and decreasing volatility, and therefore unpredictability, in returns and portfolio values.
Tom Lydon: Tell us about the index series these DeltaShares Managed Risk ETFs track?
Vinit Srivastava: We believe this is a groundbreaking index series for S&P Dow Jones Indices and the indexing industry. The S&P Managed Risk 2.0 Index series, designed and published in collaboration with Milliman FRM, represents an evolution of our original S&P Managed Risk Index series. That series, launched in 2015, was built to help investors measure the benefits of a managed risk approach and provide a benchmark for this growing segment.
Each 2.0 Index is designed to simulate a dynamic portfolio that both aims to manage volatility and seeks to limit losses stemming from equity exposure. They are constructed using three underlying indices – a select market-cap weighted S&P equity index, the S&P U.S. Treasury Bond Current 5-Yr Index and the S&P U.S. Treasury Bill 0-3 Month Index. The 2.0 indices feature a dynamic allocation mechanism that is rules-based. When *realized annualized volatility is below a predetermined target level of 22%, the given 2.0 Index will allocate 100% to the related equity index. When volatility increases and approaches or exceeds the limit, the 2.0 indices will reduce the allocation to the underlying equity index and steer toward 5-Year Treasuries and/or cash equivalents. The specific allocation between Treasuries and cash equivalents is based on the current yield spread between the two; when the yield on the Treasury index is sufficiently higher than the yield on the T-Bill index to justify the additional level of risk, the given 2.0 index will allocate to the 5-Yr Treasury index. Lastly, in seeking to limit losses, the 2.0 series methodology replicates a put option on each Index to help further reduce equity exposure. The construction methodology is extremely rigorous and was tested extensively by my team and our Index Committee. The 2.0 series are rebalanced and published daily for full transparency.
Tom Lydon: The indices sound rather sophisticated. How closely does DeltaShares seek to track the indices?
Tom Wald: While the indices may appear sophisticated, the investment objective is quite basic, strive for equity participation in rising markets and seek to take less downside risk in volatile times, when markets typically fall the most. In seeking to accomplish this, DeltaShares will be working to ensure we can track the underlying indices as closely as possible with an aim to achieve that objective.
Tom Lydon: Is it fair to categorize these ETFs as smart or strategic beta?
Tom Wald: Yes, we think the market will likely categorize DeltaShares as smart beta, however within that space we really do view DeltaShares as highly differentiated.
Vinit Srivastava: The equity indices within each ETF’s underlying S&P Managed Risk 2.0 index are market cap weighted, and are amongst the most tracked within their respective segments – the S&P 500, S&P MidCap 400, S&P SmallCap 600 and S&P EPAC Ex. Korea LargeMidCap. But the dynamic fluctuation of the equity level and the resultant allocation to the S&P U.S. Treasury Bond Current 5-Year Index and/or the S&P U.S. Treasury Bill 0-3 Month Index during periods of market stress means the ETFs aren’t simply tracking the underlying equity index and may behave differently when realized volatility is elevated.
Tom Lydon: How is this different from other smart beta category approaches? For instance, what is the difference between what DeltaShares is offering and the very popular low volatility ETFs that have gathered a lot of assets in the past couple of years?
Tom Wald: Low volatility products generally remain 100% in equities and may not offer other asset classes to help deliver their strategies. In the case of DeltaShares, we are applying a different type of approach that utilizes the correlation between market volatility and equity prices as well as the potential optimal combination of stocks and treasury bonds. This is different from low volatility ETFs which look to stay entirely invested in equities through a collection of stocks with historically low volatility, and which may not actually be specifically designed to contain volatility from a portfolio perspective. In other words, low volatility strategies take a stock-by-stock approach and remain entirely in equities. Managed Risk takes a portfolio perspective and can diversify to other asset classes.
Tom Lydon: Thank you, gentlemen.