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2 New Active ETFs With Unique Spins On Risk Management

It's simple math. It takes big gains to make up for big losses in financial markets. Actually, the gains have to be bigger than the losses to help investors just get back to even after incurring a big loss.

Two new actively manged ETFs from Illinois-based First Trust operate on the premise that it can be advantageous to miss out on some upside as long as investors also miss out on the worst drawdowns. The EquityCompass Tactical Risk Manager ETF (NYSE: TERM) and the EquityCompass Risk Manager ETF (NYSE: ERM) debuted earlier this week.

Playing It 'Safe' With TERM And ERM

The EquityCompass Risk Manager ETF's primary objective is to provide investors with long-term capital appreciation with capital preservation being a secondary objective. ERM holds 150 stocks with a median market value of $60.1 billion. None of the new ETF's holdings account for more than 0.72 percent of the fund's weight.

Top 10 holdings in ERM include Amazon.com, Inc. (NASDAQ: AMZN), Priceline Group Inc (NASDAQ: PCLN) and First Solar, Inc. (NASDAQ: FSLR). ERM charges 0.65 percent a year, or $65 on a $10,000 investment.

The EquityCompass Tactical Risk Manager ETF also seeks to provide investors with long-term capital appreciation with capital preservation being a secondary objective.

“Under normal market conditions, the Fund will seek to achieve its investment objectives by investing in equity securities of U.S. companies. During periods when the U.S. equity market is determined to be unfavorable by the Fund's sub-advisor, Choice Financial Partners, Inc. d/b/a EquityCompass Strategies, the Fund may invest all or a portion of its assets in cash, cash equivalents and short term fixed income. During such periods, the Fund may also invest a significant portion of its assets in securities designed to provide short exposure to broad U.S. market indexes,” according to the new ETF's homepage.

TERM also holds 150 stocks and also features Amazon, Priceline and First Solar among its top 10 holdings. The new ETF also charges 0.65 percent on an annual basis.

“EquityCompass believes avoiding the market’s worst down days is meaningfully more beneficial than the penalty that comes from missing the best up days,” said First Trust in a statement. “Severe losses reduce future earnings power due to a smaller capital base. Gains required to fully recover from a loss need to be greater than the original loss. For example, a 20 percent loss requires a 25 percent gain for a full recovery, and a 10 percent loss requires an 11.1 percent gain to recover. Outsized losses can add years to the time it takes to recover capital.”

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