DeltaShares: An "Ingenious Model" for Managed Risk

09/28/2020 5:00 am EST

Focus: ETFS

Jim Woods

Editor, Successful Investing, Intelligence Report

Volatility is a familiar and unavoidable reality in today’s market; here's a look at a low-volatility ETF to help shield investors from risk, asserts Jim Woods, editor of The Deep Woods.

As any seasoned investor understands, market volatility can send a portfolio into a tailspin, as breaking even requires a market surge and restoring a portfolio’s original value takes an even bigger market boost. To combat volatility attacks, a handful of low-volatility portfolios have been popping up in the exchange-traded fund space.

Their appeal has continued to grow as market fear has increased. However, while there is proof that a low-volatility portfolio can and will outperform conventional index products through keeping fund declines in check, that strategy requires patience and well-timed investments.

So, the problem becomes how can an investor capitalize on reward produced by a low-volatility ETF, while avoiding potentially major risks of such a fund strategy?

Transamerica Asset Management, along with Milliman Financial Risk Management, have partnered up to sub-advise the DeltaShares S&P 500 Managed Risk ETF (DMRL). The ETF is made up of a fleet of portfolios that adjusts equity exposure based on realized market volatility, as opposed to future or potential market volatility.

DMRL uses a rules-based index methodology, created by Milliman, to lower each of its fund’s exposure to the relevant S&P 500 index portfolio, whenever annualized volatility spikes above 22%. The index portfolio is made up of three subcomponents: equity, fixed income and cash.

The targeted equity component tracks the S&P 500 index, the fixed income component is comprised of the most recent five-year Treasury note and short-term Treasury bills and the cash component follows the zero-to-three-month Treasury bill index.

In short, when the 22% spike is hit, it triggers a reallocation of funds from stocks, into the reserve assets made up of the three subcomponents above.

The ETF has an expense ratio of 0.35% and $369.41 million in assets under management. The open-ended fund has a distribution yield of 1.25%. The fairly new fund, created in 2017, has a 6.66% three-year daily total return, a 3.78% one-year daily total return and a lagging year-to-date loss of 4.08%, which is not a complete surprise as the market has been fraught with volatility lately.

As can be seen from the chart below, DMRL has a relatively steady 50-day moving average (MA). Similar to many other funds, DMRL felt the March lows but has recovered substantially.

DMRL

While the majority of the fund’s composition of is made up of bonds, at 71.14%, the remaining 26.96% of its weight is in stocks primarily in the technology sector.

Aside from United States Treasury Notes 0.25%, which makes up 71.15% of the ETF’s top 10 holdings, its top five holdings include Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), Facebook (FB) and Alphabet (GOOGL).

Ultimately, DeltaShares S&P 500 Managed Risk ETF  is an ingenious model, which is designed to simulate the dynamic allocations made in a volatility-managed portfolio. The goal of this particular ETF is to balance the risk and reward that investors face when investing in low-volatility portfolios.

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