First Trust launches ETFs to manage downside risk

Exchange-traded funds provider and asset manager First Trust Advisors has launched the EquityCompass’ risk manager and tactical risk manager ETFs.

The funds seek to provide long term capital appreciation with capital preservation as a secondary objective. The funds’ portfolio managers employ an investment strategy that seeks to avoid large, prolonged market losses and reduce volatility.

EquityCompass believes avoiding the market’s worst down days is meaningfully more beneficial than the penalty that comes from missing the best up days.

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% loss requires a 25% gain for a full recovery, and a 10% loss requires an 11.1% gain to recover. Outsized losses can add years to the time it takes to recover capital.

“Following two devastating bear markets in the last 17 years, investors, especially those nearing or in retirement, recognize the vulnerability of equity markets and are seeking risk management solutions,” said Richard E. Cripps, CIO at EquityCompass.

“We believe these ETFs will be useful tools for investment advisors seeking to manage risk in their clients’ portfolios, while maintaining exposure to US equities. As sub-advisor, EquityCompass brings a unique approach to risk-management, supported by years of rigorous empirical research,” said Ryan Issakainen, senior vice president, ETF strategist at First Trust.

Alicia Villegas
Alicia Villegas speaks Spanish and Italian and is Iberia Correspondent for InvestmentEurope. She was shortlisted for the Rising Star Award at the British Media Awards 2017 and Writer of the Year at the PPA Independent Publisher Awards 2016. Previously, she worked for almost three years at the seafood business website Undercurrent News as a market reporter. In Spain, she also worked for more than five years for several media outlets.

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