Global X Funds Launches Rainy-Day ETF

February 08, 2012

Global X rolls out a 'permanent' ETF designed to flourish on rainy days and sunny days alike.

Global X Funds, the New York-based ETF provider known for its commodities and emerging markets strategies, today launched 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.

The Global X Permanent ETF (NYSEArca: PERM) is positioning itself to offer a measure of 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. It comes with an annual expense ratio of 0.49 percent.

With its broad-based asset allocation strategy, PERM is similar to the iShares Morningstar Multi-Asset High Income Index Fund, which was put into registration several days ago. However, in contrast to the iShares fund, which doesn’t include commodities, PERM will hold gold ETFs in its portfolio.

PERM is based on the Solactive Permanent Index. It rebalances annually. However, according to the fund’s prospectus, 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.

PERM will invest at least 80 percent of its assets in the underlying securities of its index. Its asset allocation strategy is as follows:

  • U.S. large-cap stocks: 9 percent
  • U.S. small-cap stocks: 3 percent
  • International stocks: 3 percent
  • U.S. real estate stocks: 5 percent
  • U.S. and foreign natural resources stocks: 5 percent
  • U.S. long-term Treasury bonds, with remaining maturity greater than 20 years: 25 percent
  • Short-term U.S. Treasury bills and notes, remaining maturity less than three years: 25 percent
  • Gold ETFs and exchange-traded commodities: 20 percent
  • Silver ETFs and exchange-traded commodities: 5 percent

 

The low-volatility investment strategy 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’s designed to, it will provide consistent returns whether there’s inflation, growth or a deceleration of the economy.

However, 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 initially built on equity-only funds.

Nuances Of The Strategy

Global X noted in a recent regulatory filing detailing the fund that PERM 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, U.S. value stocks in the portfolio will be equally weighted.

While the company does have an ETF on the market that focuses on Canadian preferred shares, the Global X Permanent ETF will be its first that explicitly includes bonds.

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.

 

 

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