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Greg Fierros

Greg Fierros worked with Envestnet on portfolio analysis, due diligence, ETFs, value, international and alternative investments.

Rather than sit on the sidelines and be subject to the volatility of equity and bond markets, you can now take a greater role in the management of your clients’ portfolios with Raltin’s database of asset correlations.  Raltin.com’s database of investment product correlations can be particularly useful when seeking to isolate risks of individual sectors, whether that be to increase or to avoid exposure.

In addition to being a resource for finding good ETF replacements for mutual fund investments, Raltin’s correlation matrix can be employed to seek out optimal additions to portfolios to even out volatility.  Let’s take for example, a hypothetical situation of an investor wishing to diversify a large cap core position. We will use iShares Core S&P 500 ETF (NYSEArca: IVV) to proxy this allocation. Using Raltin’s database of correlations, we can find a list of ETFs, mutual funds and individual stocks which returned the most inversely correlated performance to that of our IVV allocation.

The two most inversely correlated individual stocks to IVV are healthcare name Inspire MD, Inc (ASE: NSPR) and energy name Lilis Energy, Inc (NYSE: LLEX), both returning a correlation score of -0.13.  Holding some combination of one and the other, could have helped to further dampen total portfolio volatility.

Portfolio ETFStock Alternative 1 (correlation score, hedge ratio)Stock Alternative 2 (correlation score, hedge ratio)
iShares Core S&P 500 ETFInspire MD, Inc (-0.13,-14.74)Lilis Energy, Inc (-0.13,-5.32)

For Advisors wishing to take a more tactical, hands-on approach to portfolio construction, Raltin.com provides hedge ratio data in addition to correlation.  An ETF allocation may be more suitable in this type of a situation since generally, a total offsetting of exposure is what is being sought in this type of strategy.

Let’s say for example, you wanted to reduce exposure to the retail REIT sub-sector during the retail onslaught of 2017-2018.  Most REIT mutual funds held retail giant, Simon Property Group (NYSEArca: SPG), as the holding was the largest constituent of the FTSE NAREIT All Equity REIT index.  Many fund managers don’t want to deviate too far from the benchmark, so they held the name, regardless of the troubles in retail. As an Advisor with clients in REIT funds, rather than divest entirely from the mutual fund or ETF, you can simply leverage Raltin’s database to find an optimal hedging solution.

StockETF Hedge 1 (correlation score, hedge ratio)ETF Hedge (correlation score, hedge ratio)ETF Hedge 3 (correlation score, hedge ratio)
Simon Property Group (NYSE:SPG)Direxion Daily MSCI Real Est Bear 3x NYSEArca:DRV (-0.80,-1.87)ProShares UltraShort Real Estate NYSEArca:SRS (-0.79,-1.15)ProShares Short Real Estate NYSEArca:REK (-0.75,-0.56)

Hedging is now easy using Raltin’s analytics.  All that needs to be done is to calculate the portfolio weight of the holding to be hedged (in this case SPG), calculate the cash needed to acquire the position given the hedge ratio, and voila!  Given the above data from the Raltin database, REK would have required the smallest amount of cash to acquire the delta-neutral position to hedge SPG (a -0.56 hedge ratio). Advisors wishing to use this approach, should consider expense ratios in addition to hedge ratios.  Specialized ETFs such as leveraged or bear ETFs tend to be pricier than most, and an optimal hedge ratio may not equate to the most cost-effective strategy.

Alternatively, Advisors can short sell the long only ETFs which can be found under the “most similar ETFs” column.  This should provide additional options for attaining optimal match with respect to the return stream of the product being hedged.

StockETF Alternative 1 (correlation score, hedge ratio)ETF Alternative 2 (correlation score, hedge ratio)ETF Alternative 3 (correlation score, hedge ratio)
Simon Property Group (NYSE:SPG)SPDR Dow Jones REIT RWR (0.82,0.65)Schwab US REIT SCHH (0.82,0.65)First Trust S&P REIT FRI (0.81,0.63)