ETFs For Retirement Protection

June 14, 2017 What are the main risks of owning these ETFs? When will they not work well?

Varadi: The potential risk with the risk-managed funds is that there's no prevailing macroeconomic trend. During a period where there’s a lot of news headlines and a lot of noise—but very few trends to latch onto—that may be a period where you have lower relative performance.

Tinney: I would add that the risk-managed funds won’t protect you from a flash crash, from something that happens over one, two days. We’re trying to protect from extended periods of drawdown. We’re not moving day-to-day to do any of this stuff.

Once we see a trend of market decline or markets rising, we make adjustments. We evaluate portfolios and risk-managed funds daily. It doesn’t mean we’re making adjustments daily. Your firm is the biggest holder of these funds, right? Do these ETFs solve an internal client problem, or do you see them as something the ETF market was lacking?

Tinney: We’ve gotten great feedback from advisors, but it’s taken time to educate people about them. It’s not “Schwab has a new 0.03% S&P 500 ETF, so I can save some money”; these are alternative investments packaged in ETFs. We’ve been talking with advisors, and we’re pushing more with our sales organization.

We intend to add more colors to the color palette, because there's a gap in the market when it comes to this type of solution. There're a few firms that have trend-based approaches, but they're not trying to get you out of the way of the falling knife; they're trying to get more return. We believe in diversification. There's a big focus on cost among ETF investors. QuantX ETFs aren’t cheap. Is the idea here that portfolio insurance doesn’t come cheap?

Tinney: We looked for the least expensive way to offer the protection we’re trying to provide. If we packaged it in an alternative mutual fund category, our expenses are below market. We’re alternatives. We’re not trying to compete against SPY. That’s not our market.

I’d love to have $1 trillion under management, but that’s not what we’re going for. We’re trying to find a place as an alternative, yet transparent and highly tax-efficient manager of capital versus the alternatives in the mutual fund route, where costs aren’t as much an issue, and transparency isn’t there. After factoring fees in, investors are still light years better off than if we did what we’re doing in any other wrappers.

Contact Cinthia Murphy at [email protected]


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