iQ Risk On / Risk Off ETF Model
INVESTMENT OBJECTIVE
The iQ Risk On / Risk Off ETF Model seeks capital appreciation with a focus on producing positive returns in bull and sustained bear markets by shifting between risk-on (stocks) and risk-off (bonds) assets.
PROCESS
The iQ Monthly Risk On / Risk Off ETF Model utilizes four non-correlated factors to determine an allocation between stock ETFs (Risk On) and a bond ETFs (Risk Off).
The Model utilizes the following four non-correlated factors:
Technical (price to moving average)
Macro (movement of the US Dollar)
Valuation (S&P 500 P/E and Earnings Yield)
Seasonal (six months in, six months out)
The Model allocates 25% to each of the aforementioned factors. The Model is completely allocated to stock ETFs if all four factors are "risk on." A 50% allocation to stock ETFs and a 50% allocation to a bond ETF are made by the model if two out of the four indicators indicate that there is "risk on" behavior.
How are the ETFs selected?
The iQ Risk On Risk Off ETF Model follows a monthly rules-based and repeatable investment selection process:
Begin with a starting universe of sector, style box, and broad market equity ETFs
Sort by one month return and remove the top 20%.
Sort by regressive price momentum and select the top five.
The benefits of a risk-on / risk-off approach
In a risk-on/risk-off (RoRo) investment approach, an advisor modifies the allocation of their portfolio in accordance with how risky they perceive the market to be. This strategy involves investing in riskier assets during the "risk-on" phase when the advisor believes that market conditions are favorable and risk is low. In contrast, during the "risk-off" phase, when they believe that market conditions are unfavorable and risk is high, they will rebalance their portfolio to include less risky assets.
Some of the potential benefits of a risk-on/risk-off investment approach include:
1. Diversification: By rotating between asset classes based on market conditions, investors can achieve a more diversified portfolio and potentially reduce overall risk.
2. Capital preservation: The RoRo approach can help protect capital during times of market stress by shifting to less risky assets.
3. Opportunity for higher returns: During the risk-on phase, investors can potentially earn higher returns by investing in riskier assets that have the potential for higher returns.
4. Flexibility: The RoRo approach is highly adaptable and can be adjusted to suit changing market conditions and the investor's risk tolerance.
It's crucial to remember that the RoRo approach could also have disadvantages, such as the chance of missing out on market opportunities during the risk-off phase.
Overall, the RoRo approach can be a useful strategy for investors who are comfortable with a more active and flexible investment approach.
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.