Global X Drafts Risk-Focused ETF

April 23, 2012

Global X Funds, the New York fund provider known for its niche strategies, filed paperwork with U.S. regulators to market a broadly diversified ETF that promises capital appreciation through a risk-focused asset allocation strategy.

The Global X Risk Parity ETF will invest in everything from equities to bonds to commodities and derivatives, but it will determine those allocations based on risk measures—such as volatility—as it seeks to increase its value while mitigating risk. No ticker or fees were disclosed.

The fund will employ what Global X called a “risk parity approach” to asset allocation, meaning it will underweight the riskier assets—such as global and emerging market equities—and overweight lower-risk segments, such as global fixed income and inflation-linked government bonds, it said in the filing.

Asset allocation ETFs often turn to broadly diversified exposure schemes to capture growth and income in the long run. Such strategies are attractive to more risk-averse investors and have gained favor in the aftermath of the 2008 credit crisis that sent equities market into a tailspin and the economy into a deep recession.

Global X is hoping to join other fund providers, such as Wheaton, Ill.-based Invesco PowerShares and San Francisco-based iShares, that have already tapped into the space. The fund-of-funds PowerShares RiverFront Tactical Growth and Income Portfolio (NYSEArca: PCA) is one of the older funds in the category, while iShares’ roster of asset allocation strategies offer more nuanced plays based on an investor’s risk profile.

They include the iShares S&P Aggressive Allocation ETF (NYSEArca: AOA), the iShares S&P Conservative Allocation ETF (NYSEArca: AOK) and the iShares S&P Growth Allocation ETF (NYSEArca: AOR).

AOR is the biggest of the three, with $137 million in assets, and has returned 4.6 percent year-to-date, according to Google Finance data. By contrast, AOA’s more aggressive take has climbed 6.68 percent during the same period, while AOK only gained 1.84 percent.

Playing With Leverage

The new ETF will track the multi-asset-class FXcube Risk Parity Index, which includes currencies and real estate. It covers markets in emerging as well as developed markets.

The fund might also have leveraged exposure to some of these asset classes.

In fact, as much as 20 percent of the portfolio might be allocated to derivatives such as futures contracts, options, swaps and cash equivalents, the filing said.

“Leveraging tends to magnify, sometimes significantly, the effect of any increase or decrease in the fund’s exposure to an asset class and may cause the fund’s net asset value to be volatile,” the company said in the filing.


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