Global X Plans An ETF For All Seasons

By
Alex Ulam
November 11, 2011
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Global X plans an ETF that serves up certainty in an uncertain world.

Global X Funds, the New York-based ETF provider known for its commodities and emerging markets strategies, filed regulatory paperwork to bring to market a multi-asset-class index fund designed to profit in different macroeconomic scenarios. It also happens to be the company’s first ETF to include bonds.

With market volatility peaking as the global economy careens from one crisis to the next, and publications such as The Economist running cover stories with titles such as “Nowhere to Hide,” The Global X Permanent ETF is positioning itself to offer certainty in an uncertain world. The new ETF is a modern version of the 60 percent equities/40 percent bonds that investors traditionally used to build wealth while minimizing risk.

The relatively new low-volatility investment strategy for ETFs that is a signature of the planned Global X fund is called “Risk Parity,” an investment approach that was pioneered in 1996 by the Connecticut-based money manager Bridgewater Associates, with its All Weather hedge fund. Risk Parity is intended to dampen volatility through a diverse portfolio of various noncorrelated assets.

The theory is that with exposure to a variety of asset classes, one asset class may blow up, while others outperform and still others remain flat. If the Global X fund works the way it is supposed to, it will provide consistent returns whether there is inflation, growth or a deceleration of the economy. Of course, in the event of a 10-year equity boom, the fund would most likely underperform.

IndexUniverse’s ETF Classification System shows only 25 ETFs that use an asset allocation approach, a relative novelty in an industry that was initially built on equity-only funds.

Global X’s Permanent ETF, which will be based on the Solactive Permanent Index, will include:

  • Value stocks of some of the largest U.S. firms, measured by market capitalization
  • Both short-term and long-term U.S. Treasury bills and bonds, including Treasury inflation-protected securities (TIPS)
  • Physical gold ETFs
  • Real estate investment trusts (REITs)
  • Shares of companies involved in natural resources, including oil, gas, and precious and nonprecious metals

 

Nuances Of The Strategy

Global X noted in the filing that the fund will limit its foreign investments to natural resources companies, to avoid creating imbalances that could occur from exposure to foreign economies.

Additionally, in line with the emphasis on maintaining a consistent risk level, the U.S. value stocks are equally weighted.

Global X also said that at the very least, the fund will rebalance twice a year. However, the Global X Permanent ETF could be rebalanced at any time if some extraordinary event causes the weightings of the various asset classes to deviate significantly from the index.

The prospectus didn’t specify the baseline allocation percentages in the index, which will come from Germany-based Structured Solutions AG.

In its SEC filing, Global X didn’t list a ticker, an expense ratio or the exchange on which the fund will be traded.

The company does have an ETF on the market that focuses on Canadian preferred shares, but, as noted above, the Global X Permanent ETF will be its first with actual bond securities.

Preferred shares are quite like bonds in that they have a par price and pay a dividend, but they tend to have exceedingly long maturities and, in the case of corporate debt, preferred shares are lower on the capital structure than corporate bonds.

 

ETF DAILY DATA

The consumer discretionary fund 'XLY' garnered a $1 billion-plus blast of creation on Tuesday, March 3. Still, a falling market offset net inflows and pulled total U.S.-listed ETF assets down to $2.092 trillion.

'VCR,' the consumer discretionary fund, paced Vanguard's issuer-leading inflows on Tuesday, March 3, as total U.S.-listed ETF assets ended the day at $2.092 trillion.

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