Deconstructing Sophisticated ETF Portfolios


If you're an advisor there is a good chance you get regular emails from Michael Venuto of Toroso Asset Management. We all get a ton of emails from fund companies and asset managers and of course we cannot engage with all of them but the ones from Toroso you should. I have no affiliation with Toroso but met Mike almost five years ago and had a chance to talk to him at length. Since then Toroso has evolved to be the brains behind a block chain ETF and Toroso also offers its own ETF Industry Exposure & Financial Services ETF (TETF) which I wrote about in November.

Toroso has also branched out into ETF portfolios that I might describe as targeting very specific outcomes. The email I received talked about four of them, not sure if there are more, as follows; Target Income Portfolio, Global Alpha Portfolio, Sector Opportunity Portfolio and All Weather Plus Portfolio. It's the last two that I am most interested in.

Sector Opportunity seeks "to outperform the S&P 500 Index over a full market cycle while maintaining lower volatility than the market." As the name implies, the portfolio is built primarily with sector funds and it also allocates 20% to volatility based funds to manage volatility. The literature (not sure if it is ok to link to it so I am not) shows an inception date of July 1, 2013. It outperformed the S&P 500 by a wide margin in 2013 but has lagged each successive calendar year. The portfolio targets a beta of 0.85 and if I am reading correctly it has achieved that objective. Surprisingly, the standard deviation is higher than the S&P 500 by a little bit and the Sharpe Ratio is a tad lower.

It is possible that it does not put 20% into volatility funds. Looking further into the fact sheet, it says 6% in "volatility harvesting" and 12% "market hedge." There is another 2% in cash so maybe the 20% is simply in low or negative correlated exposures including some VIX products that although very volatile can reduce correlation thus reduce volatility. The iPath S&P 500 VIX Short Term Futures ETN (VXX) for example has a negative correlation that usually ranges between -0.50 and -0.90. In just about any time period you could look, VXX is down 95% or more. I would not be comfortable using something like VXX because of how frequently it goes down. It is possible Toroso is using short volatility products but they tend to have a positive correlation and I think the risk is unfavorably asymetric as evidenced by what happened in February. The holdings are not disclosed for this portfolio so I am not sure whether it uses VXX or not.

For the market hedge sleeve the portfolio might be using AGFiQ U.S. Market Neutral Anti-Beta Fund (BTAL). Mike talked about this fund on ETFiq months ago and I added it to client accounts in May. As I had hoped, BTAL looks different from the market just about every day thus it reduces the portfolio's volatility and correlation slightly. Without full transparency for this portfolio it might be just as simple as Sector Opportunity has too much in portfolio diversifiers and they are too much of a drag on the portfolio. I have been all in on using products to dampen portfolio volatility ever since I started managing money but I have always believed (and blogged) that a little bit goes a long way. Something like BTAL or an inverse fund will grow to hedge more of the portfolio as the market goes down.

The name for the All Weather Plus Portfolio might be inspired by Bridgewater's All Weather Portfolio but that is a risk parity fund and the Toroso version appears to resemble the permanent portfolio with 25% allocations to prosperity (domestic equity), recession (cash proxies like short term treasuries), inflation (commodity exposure with several gold funds and also common stock of US Global Investors GROW) and deflation (intermediate bond ETFs).

The objective of this portfolio is to "exceed inflation with 1/3 the volatility of equities." There are several benchmarks listed none of which are inflation oriented. The first one listed might be the primary benchmark; the Solactive Neutral Index. I was unable to find information on the index at the Solactive website. While I would guess that it is a market neutral index, it was up more than 9% in 2017 which seems like a massive jump for market neutral. The All Weather Plus has outperformed this benchmark far more often than not. It's beta is in line with with benchmark, standard deviation at 5.47 is little higher and the Sharpe Ratio is much higher. The report for one of the other portfolios lists the standard deviation of the S&P 500 at 9.89 which is useful in comparing All Weather which has a volatility target versus equities.

One part of the fact sheet says that the commodity sleeve can include other alternatives not just gold, so for now it chooses to own four different gold funds and maybe GROW is a proxy for gold too. Either way that is way too much in gold or commodities for me. Typically I aver for small allocations to alternatives but considering All Weather's market neutral objective, 25% may not be too much but I would have just a little in gold and more in alternatives to complete this sleeve. Finding alternatives that actually deliver a market neutral return can be difficult, a lot of them fail to deliver. You can do some research at's search page. I would not limit the search to just ETFs, there are plenty of traditional mutual funds in the alternatives space. I continue to like merger arbitrage and hedge fund replication chosen selectively in this context. I would not use BTAL here, it has a negative correlation to equities which is not what this portfolio needs.

The equity sleeve is a mix of broad based funds with a couple of thematic funds including TETF. While I like the idea of mixing broad based and thematic, TETF is a financial sector proxy so you if you were mimicking the portfolio you would want to look through to the broad based proxies to understand how much financial exposure you actually have.

Something like All Weather Plus can be useful on several fronts; for investors who do not need the full return potential of the equity market for their financial needs to be met or someone worried about adverse sequence of returns for the couple of years before they retire and right after they retire. I would do things a little differently as I alluded to but there is a lot that is useful, get on Toroso's distribution list to learn more.