ETF Portfolio X-Ray: BCM Paradigm Tactical Factor Selection

November 16, 2016

There is no single recipe to building an ETF portfolio. But understanding how a portfolio is built is key to picking the right one. And choices certainly abound, with hundreds of ETF strategist portfolios commanding nearly $100 billion in combined assets today.

For that reason, we are setting out to better understand how ETF strategists go about creating these portfolios in a series of interviews that look under the hood of some of the ETF portfolios available to retail, institutional and advisor clients alike.

Today’s Portfolio: BCM Paradigm Tactical Factor Selection

Provider: Beaumont Capital Management (BCM)

Provider Total AUM/AUA: ~$3.7 billion

We Talked To: Eric Biegeleisen, strategy portfolio manager and director of quantitative research; and David Haviland, managing partner and BCM portfolio manager.

Primary Goal: In simple terms, it uses smart-beta ETFs to pursue alpha. The BCM Paradigm Tactical Factor Selection looks to outperform on the upside while mitigating some of the downside risk. It is a rules-based system that risk-weights widely accepted factors of the U.S. equity market and, like all BCM strategies, can move to a money market or similar defensive positioning in times of heightened market volatility.

Methodology: At the core of the methodology is BCM’s main investment philosophy: Investors aren’t risk adverse, they are loss adverse. The process is built around the premise that volatility is driven by human behavior; that this behavior tends to repeat over time; and that it ultimately can be a useful investment indicator. The BCM Paradigm process looks to take advantage of this behavior by identifying paradigm shifts between normal market conditions and more volatile periods for each investment to capitalize on growth opportunities or to get out of the way of large market losses.

Using a set of quantitative models trained on multiple time frames, the strategy looks at smart-beta ETFs and determines if it is in a “normal” or “volatile” state. If in a normal state, the ETFs are risk-weighted by the system based on their relative attractiveness. If one (or more) ETF is determined to be in a volatile or unattractive period, this weighting can go into a money market. If all positions are determined volatile, the entire portfolio can go into a money market.

Ultimately, the Paradigm system uses the inefficiencies the markets present and looks to invest in factors with the greatest reward potential, and reduces or avoids those with the least—or possibly zero—potential for gain.

Target Client: This growth strategy is available to advisors, retail investors and institutions. But it may be ideal for those who support the notion that there is inherent return available by investing in smart-beta factor ETFs, but who also recognize that like all equities, smart beta can be hurt by market sell-offs.

Asset Allocation Breakdown:

 

All ETFs? Yes

ETFs included in this portfolio as of 10/31/16: 

Fees: The underlying weighted ETF expense ratio as of 10/31/16 was about 0.26%, and the BCM management fee is 0.50%. Additional custodial fees vary by institution.

Performance (as of 09/30/2016 net of an annualized 0.50% management fee):

YTD Total Return: 7.96%

 

Contact Cinthia Murphy at [email protected]

 

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