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Reduce Risk, Add Diversity With ETFs


Many adviors and investors are constantly trying to limit risk and improve diversity within their portfolios. Understanding how any security, including exchange traded funds, fits into a portfolio’s landscape, is integral in the risk reduction and diversity enhancement process.

Some ETF strategists are offering new ways to accomplish both risk reduction and increased diversification, including San Francisco-based Lattice Strategies.

Lattice “offers a series of portfolios called Risk-Optimized Core (ROC) that combine traditional equity, fixed income and commodity ETFs with liquid alternative mutual funds. Each ROC portfolio provides exposure to what Lattice describes as enterprise assets (such as US equities and developed Europe equities); real assets (such as commodities and real estate); yield assets (such as high yield and emerging market bonds); market hedge assets (such as U.S. Treasuries and investment grade bonds) with liquid absolute return (such as fixed income absolute return); and liquid hedged strategies (such as long/short equity),” said S&P Capital IQ in a new research note.

Lattice’s ROC 70 is designed to incur volatility and have value at risk below 70% of its benchmark, according to S&P Capital IQ. The strategist uses bottom-up and top-down analysis in building its portfolios, which include positions in some of the largest U.S. and Europe-focused ETFs.

According to S&P Capital IQ, Lattice’s ROC 70 recently held positions in the SPDR S&P 500 ETF (SPY) , the world’s largest ETF, and the Vanguard FTSE Europe ETF (VGK) at the end of the second quarter. [Super Value ETFs]

VGK, rated overweight by S&P Capital IQ, has hauled in $2.66 billion in new assets this year after bringing in $6.86 billion last year. The fund has been bolstered by its conservative country posture, which has allowed risk-averse investors to gain exposure to European without large weights to peripheral Europe. The U.K. and Switzerland combine for almost 46% of VGK’s weight. [More Upside for Europe ETFs]

The Lattice ROC 70 strategy also recently had a position in the iShares MSCI Pacific ex Japan ETF (EPP) , according to S&P Capital IQ. The research rates the $3 billion EPP overweight.

Although EPP is an Asia-Pacific ETF that excludes Japan, it is tilts away from the region’s riskier equity markets with an almost 64% weight to Australia, which helps give EPP a trailing 12-month yield of 3.88%. [Consider Australian Dividends]

Alternative asset classes held by Lattice include gold, master limited partnerships and a stake in the Vanguard REIT ETF (VNQ) , the largest REIT ETF. S&P Capital IQ also rates VNQ overweight.

“Lattice makes adjustments to the broader asset allocation and the narrower investment styles on a quarterly basis, but harvests tax losses while maintaining intended exposures to create tax efficiencies. There were forty ETFs and mutual funds inside ROC 70, providing ample diversification in our opinion,” said S&P Capital IQ.

iShares MSCI Pacific ex Japan ETF



Tom Lydon’s clients own shares of SPY and VNQ.