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- Invest exclusively with highly liquid ETFs - each providing exposure to a diversified basket of securities - virtually removing specific risk.
- Invest on a global basis in lower correlated ETFs, across several asset classes (bonds, commodities, currencies, and equities);
- Further Managed through a dynamic strategy of using both long and short positions (see table below);
- Optimize on a monthly basis for Canadian dollar investors to limit foreign currency risk from exposure to global markets.
| Market Conditions | Risk Management Strategy |
|---|---|
| Low Systemic Risk | Long-Bias Portfolio |
| High Systemic Risk | Short-Bias Portfolio |
| Unclear Systemic Risk | Market-Neutral Portfolio |
| Risk Factor | Control Metric |
|---|---|
| Maximum Leverage: | Conventional leverage only (3 : 1) |
| Maximum Net Long Position: | 300% |
| Maximum Net Short Position: | 100% |
| Maximum Position Size/ETF (% of Portfolio): | 25% (12.5% for commodities and currencies) |
| Expected target stop-loss (per position): | 5% |
| Minimum Number of Positions: | 4 ETFs, allowing for proper diversification |
"Improving upon moving average envelopes, our “Probability Band” model projects price targets that tell us if an ETF is overvalued and approaching a change in its cycle."
We use probability bands to assess the risk versus reward metrics of the assets historic behaviour and build an expectation of what could happen in the future. An oversold condition in a bull market has an extremely high probability of yield superior returns. Our probability bands quantify this relationship and is often an early warning sign that is helpful as we navigate the globe for value opportunities.
When buying oversold conditions, we anticipate a quick recovery, investments that do not show positive returns in a relatively short period of time are removed from the portfolio. This is because our research has shown that the most powerful advances and declines occur when an asset is emerging from a cyclical trough or falling from a cyclical peak.
ETFs are often heavily weighted in favor of several of their constituents. When this is the case, we carefully observe the behavioral responses from the market to fundamental factors that may have an impact on those securities.
Fundamental factors we inspect include:
"The ETFCM currency protection program is a dynamic methodology that allows favorable currency movements to be an additional source of portfolio alpha."
Since most of the liquid universe of ETFs is currently traded in US dollars, the NAV is calculated each month by converting the US$ value of the portfolio back to Canadian dollars. Each month, the marked-to-market FX rate used for the NAV calculation becomes the benchmark used to protect against adverse currency movements.
Once our volatility target is reached, the benchmark level is raised to “lock in” additional alpha for the portfolio. So if the Canadian dollar gets weaker in any monthly period, investors will benefit from the move when the US dollar holding are converted back to C$. If there is an adverse currency move above the benchmark rate, the benchmark level is used to purchase protection by way of currency futures. The profit in the futures contract should offset most of the adverse currency movement.*
 | ETF Capital Management is a Member of The Investment Counsel Association of Canada. |