Managed Risk Fund Provides Automatic Investment Rotation

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker, financial journalist, and money manager.

(Note: third in a series on hedged-equity, low-volatility ETFs)

For investors who are seeking exchange-traded fund (ETF) investments with low volatility that can still produce quality returns, DeltaShares S&P 600 Managed Risk ETF (DMRS) provides an interesting strategy.

This fund strikes a balance between active and passive management by managing itself through a set of rules that governs how it changes its holdings. Specifically, the fund invests in small-cap stocks via the S&P 600, bonds and/or cash, depending on market conditions and how they trigger the fund’s rules.

When volatility is low, DMRS shifts towards being a small-cap fund. It allocates more of its holdings to Treasury notes and bills as a hedge when volatility increases.

This fund is down 8.10% over the past 12 months. The reason for this appears to be a failure of its strategy, as it looks to have been invested in stocks when the market crashed in March and then shifted to less risky assets to avoid that volatility. This has resulted in a lukewarm recovery. That said, this is an exceptional circumstance which is not likely to occur often.

DMRS has an expense ratio of 0.45% and pays a 0.74% dividend yield, though the yield may be more subject to change than other funds due to shifts in strategy. It has just $33 million in assets under management, which means that it falls below my recommended threshold for investment. However, the fund’s strategy is interesting and worth bringing to your attention.

Chart courtesy of StockCharts.com

The fund is currently more than 86% allocated to bonds. Apart from bonds, the fund’s top holdings include Exponent Inc. (EXPO), Qualys Inc. (QLYS) and TopBuild Corp. (BLD). However, judging from the low weights allocated to these companies, it appears that DMRS is trying to distribute its stock investments as evenly as possible across the S&P 600 index.

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For investors who feel that a managed, rules-based fund is a smart idea for automatically rotating investors into particular asset types, DeltaShares S&P 600 Managed Risk ETF (DMRS) is an interesting fund to investigate.

In closing, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.

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