Beware: Portfolio Risk Has Dropped

September 26, 2017

The chart below, created by CLS Portfolio Manager Grant Engelbart, CFA, illustrates how risk has changed for many ETFs. It shows year-over-year changes in relative risk (as defined by dividing the standard deviation of the ETF by the standard deviation of a global equity benchmark) and in portfolio beta.



It’s All Cyclical

Some conclusions:

  • Relative risk increased in every broad asset class, except the iShares MSCI EAFE Value ETF (EFV) (developed international value stocks), in the two one-year periods shown, but there were a lot of divergences in betas.
  • Energy and natural resources saw large risk reductions from a beta standpoint.
  • Emerging market risk has also dropped significantly.
  • Many funds are overweight to the consumer discretionary sector (Amazon dominates this sector, but it also includes investor darlings, such as Netflix and Tesla, along with powerhouse names like Home Depot and McDonald’s), which has actually increased in beta by 25%.

In summary, portfolio risk—whether measured in absolute or relative terms, or both—has been dropping this year. I would suggest caution and warn that these numbers won’t always look like this. Absolute volatility is cyclical and will rise. Correlations are also cyclical, and they will also rise. 

For many ETF investors, I have two recommendations. First, simply be aware of how exceptional the current environment is and anticipate that portfolio risk will rise again. Second, it might be a good time to consider broader diversification, whether that means becoming more global, adding more real assets or even diversifying further into value-oriented sectors, such as financials and energy.

Doing so should help manage overall portfolio volatility, especially once overall stock market volatility starts to pick up again.

At the time of this writing, CLS Investments invests in all of the securities mentioned above for its clients. CLS Investments is a third-party investment manager and ETF strategist. It began to emphasize ETFs in individual investor portfolios in 2002, and is now one of the largest active money managers using exchange-traded funds. Contact CLS’ Chief Investment Officer, Rusty Vanneman at 402-896-7641 or at [email protected]. Please click here for a complete list of relevant disclosures and definitions.



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