The RPAR fund’s focus on risk has turned out to be a plus during the market tumult triggered by the coronavirus lockdowns.
Photo: Getty Images/iStockphotoLaunching an exchange-traded fund is always an uncertain venture. But trying to do it during a pandemic takes it to a new level.
Yet that’s what one company did: RPAR Risk Parity ETF (RPAR) made its debut on Dec. 13, right around the time Covid-19 was starting to ravage Wuhan, China.
RPAR’s focus on risk has been a plus during the market tumult that has ensued, with the fund’s assets under management growing to more than $400 million since inception and substantially outperforming the broader market. The ETF returned 1.3% including dividends in the year through April, compared with a 9.2% fall for the SPDR S&P 500 ETF over the same period, according to Morningstar Inc.
“It came to market at the right time,” says Todd Rosenbluth, head of ETF and mutual-fund research at New York-based research firm CFRA. “It’s rare to see a fund come out of the gate and grow organically.”
As its name suggests, the fund employs a risk-parity strategy. Such strategies usually involve allocating assets based on their level of risk. In the case of stocks and bonds, that would mean shifting more assets to bonds when stocks are more volatile and vice versa.
Advanced Research Investment Solutions, or ARIS, the Los Angeles-based company that runs the ETF, takes a similar approach but does so using more asset classes.
The RPAR fund targets risk allocations of 25% each for global stocks, commodities, U.S. Treasurys and TIPS, or Treasury inflation-protected securities.
“We structure each asset class to derive equal risk and equal return,” says Alex Shahidi, a partner at ARIS. “Thus, we end up with a mix of diverse asset classes that go up and down at different times, but all have similar long-term returns.”
The ETF makes use of a combination of some other ETFs, such as GraniteShares Gold Trust (BAR) and iShares Core S&P Total U.S. Stock Market ETF (ITOT), as well as direct investments in Treasury bonds and bond futures. “They are using the low-cost liquid nature of the ETFs to their advantage,” says Mr. Rosenbluth.
However, equal risk allocation doesn’t mean equal asset allocation. The target asset allocations are 20% TIPS, 25% equities, 15% commodities, 17.5% gold, and 42.5% Treasurys.
While that sounds simple, RPAR’s mechanics involve some sophisticated financial wizardry. Part of the portfolio uses leverage, or borrowed money, to enhance returns, which also explains why the asset allocations add up to more than 100%.
The target leverage is 20%, which is less than most other risk-parity strategies, says Damien Bisserier, a partner at ARIS. While using some borrowed money can juice returns, high levels of borrowing can be dangerous. That’s because lenders can call in loans if asset prices swing too much, thus forcing portfolio managers to sell at the worst prices.
CFRA’s Mr. Rosenbluth says the modest leverage used by the fund doesn’t concern him.
Unlike other risk-parity funds, RPAR’s portfolio gets rebalanced each quarter, rather than when the volatility or risk of an asset class changes.
“A lot of risk-parity portfolios will cut their positions when volatility spikes, but we don’t do that,” says Mr. Bisserier. “We take a long-term view of volatility, and that actually protects you against these extreme environments.”
Perhaps most pleasing to ARIS is that it outperformed other funds that appear to be in the same niche. Morningstar has no category for risk-parity funds, but it did collect data on those with “risk parity” in the fund name.
During the first quarter, the RPAR fund, the only ETF in the group, lost 5%, outperforming the other funds (all mutual funds), which lost an average of 10.2%. Multiyear comparisons weren’t possible because the RPAR fund is too new.
“It’s nice when you have a plan in place and you are tested right from the start and it works,” says Mr. Shahidi.
Mr. Constable is a writer in Edinburgh, Scotland. He can be reached at reports@wsj.com.
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