iQ Risk On / Risk Off ETF Model
INVESTMENT OBJECTIVE
The iQ Monthly Risk On / Risk Off ETF Model seeks to provide positive returns regardless of the directions of the economy or financial markets by tactically allocating between stock and bond Exchange Traded Funds on a monthly basis.
The Model utilizes the following four non-correlated factors to determine an allocation between stocks (Risk On) and bonds (Risk Off).
Technical (price to moving average)
Macro (movement of the US Dollar)
Valuation (S&P 500 Price-to-Earnings Ratio)
Seasonal (six months in, six months out)
PROCESS
Each of the aforementioned factors account for 25% of the Model’s allocation. If all four of the factors are “risk on”, then 100% of the Model is allocated to stocks. If 2 of the 4 indicators are “risk on”, then 50% of the Model allocates to stocks while the other 50% allocates to bonds.
When the Model allocates to equity Exchange Traded Funds, it utilizes the following (monthly) sector screen:
Start with 11 sector and 7 style box domestic ETFs
Sort by one-month return and remove the worst two.
Sort by short-term max draw-down and select the best 3
Benefits of Risk On / Risk Off strategies
Risk-on, risk-off (RORO) investing involves shifting asset allocation between higher-risk (risk-on) and lower-risk (risk-off) assets based on market conditions. During risk-on periods, advisors may allocate more assets to riskier assets such as stocks or commodities, while during risk-off periods, advisors may allocate more assets to less risky assets such as bonds or cash.
The main idea behind RORO investing is to take advantage of market cycles and adjust investment portfolios to capture potential gains while mitigating potential losses. During bull markets, when riskier assets tend to perform well, investors may overweight their portfolios towards stocks or other riskier assets. During bear markets or times of uncertainty, investors may shift their portfolios towards less risky assets to help mitigate losses.
There are different ways to implement RORO investing, including using technical analysis, market sentiment indicators, or economic data to determine market conditions. Some investors may also use quantitative models to allocate assets between risk-on and risk-off positions.
RORO investing can potentially provide benefits, such as the ability to capture gains during market upswings and mitigate losses during market downturns. However, there are also risks associated with RORO investing, including market volatility.
Please be aware that risk-on, risk-off strategies involve heightened risks and may not be suitable for all investors. These strategies aim to capitalize on market fluctuations, shifting between riskier and safer assets based on prevailing market conditions. However, the effectiveness of such strategies is subject to uncertainties, and there is no guarantee of consistent positive returns. Investing in risk-on assets during market upswings may lead to higher returns, but it also exposes investors to greater losses during downturns. Conversely, allocating to risk-off assets during market declines may offer protection but can result in missed opportunities during growth periods.