For instance, Legg Mason has partnered up with QS Investors to launch a group of smart beta ETFs, including the Legg Mason US Diversified Core ETF (NasdaqGM: UDBI), Legg Mason Developed Ex-US Diversified Core ETF (NasdaqGM: DDBI) and Legg Mason Emerging Markets Diversified Core ETF (NasdaqGM: EDBI). Through a partnership with QS Investors, the funds take a macro, top-down approach that help balance risk to deliver broad market exposure by incorporating QS Investors’ proprietary Diversification Based Investing (DBI) rules-based methodology. QS Investors has provided custom solutions for institutional and pension funds for 15 years.
The funds break down the universe of securities into investment categories based on sectors and countries. The five-year return patterns of the countries and sectors are taken to uncover relationships – areas that behave alike or differently. The index then combines investment categories with more highly correlated historical performance into smaller number of so-called clusters, which are categorized based on tendency to behave similarly, or show various correlations. Each of these clusters are then equally weighted individually and also equally weighted across the portfolio to produce a diversified investment strategy.
Investors may also turn to commodities as an alternative asset with uncorrelated returns to better diversify a traditional portfolio of stocks and bonds. Those who are interested in broad exposure to the commodities market may look to something like the United States Commodity Index Fund (NYSEArca: USCI). USCI eschews rolling front month contracts, which can lead to underperformance, especially in a contangoed market, rebalancing each month and selecting the most-backdated contracts and then the seven highest-returning contracts. The commodities ETF tries to reflect the performance of the SummerHaven Dynamic Commodity Index Total Return Index, which consists of 14 commodity futures. The index is reformulated each month from 27 possible futures contracts.
Additionally, a new family of ETFs, called Portfolio+ ETFs, may help investors potentially enhance their bullish stance by providing 25% added daily exposure to popular broad-based indexes targeted by advisors. The ETFs include the Portfolio+ S&P Mid Cap ETF (PPMC), Portfolio+ Developed Markets ETF (PPDM), Portfolio+ Emerging Markets ETF (PPEM), Portfolio+ Total Bond Market ETF (PPTB), Portfolio+ S&P 500 ETF (PPLC) – formerly Direxion Daily S&P 500® Bull 1.25X Shares, and Portfolio+ S&P Small Cap ETF (PPSC) – formerly Direxion Daily Small Cap Bull 1.25X Shares.