Here is an interview with Josh Emanuel, who is the Chief Investment Officer of The Elements Financial Group, and he is here to discuss the new ETF YPRO.
Josh EmanuelJosh Emanuel
What’s your professional background?
I currently serve as the Chief Investment Officer of The Elements Financial Group, LLC (TEG). Prior to joining TEG, I served as Head of Strategy, Head of Investment Manager Research, and Co-Chairman of the Investment Committee for Wilshire Funds Management, a division of Wilshire Associates, Inc. Prior to Wilshire, I was responsible for International Investment Manager Research for Jeffrey Slocum & Associates. I hold a B.S.B.A in Finance from the University of Pittsburgh. I have also earned the Chartered Financial Analyst designation (CFA) and I am a member of the CFA Society of Los Angeles.
What led you to partner with AdvisorShares on actively managed ETFs?
We became intrigued with the unique line-up of actively managed ETFs offered by AdvisorShares, and have been investing with them for several years now. Over time, both organizations recognized the potential synergies in partnering to provide unique solutions to the market. As we evaluated prospective partners through which we could offer our asset management solutions, we found that AdvisorShares had a comprehensive appreciation of our unique investment process, and we have been impressed by their success in building their brand and successfully growing a business of high quality ETFs.
What makes this ETF different from other actively managed ETFs?
AdvisorShares YieldPro (YPRO) is a multi-asset income strategy that seeks to provide investors with a competitive yield at a low level of volatility that is commensurate with traditional bonds. We have structured the portfolio to be a suitable substitute to traditional fixed income risk by employing a structured investment process that focuses on maximizing yield and managing volatility through a quantitative approach to risk management, which also includes the use of options to hedge residual equity and interest rate risk as needed. This is unique relative to many other multi-asset income strategies, which typically exhibit a significant level of equity risk and are often very correlated with equity markets.
What’s your investment approach in managing YPRO?
We seek to allocate to segments of the market that offer the most compelling risk-adjusted risk premiums, and seek to identify the best income oriented investments through which we can access these exposures. Our portfolio construction process begins with an assessment of broad market conditions to determine our targeted level of risk, which is based on quantitative and qualitative assessments of market risk, including but not limited to credit spreads, equity market valuations, economic conditions, interbank stress, structural issues, market activity (flows) and technical analysis.
We then seek to determine how best to allocate our risk. This decision is partially the result of a quantitative optimization process which seeks to maximize the yield in the portfolio for a given level of absolute volatility. The quantitative optimization process is complemented with qualitative oversight to ensure that the portfolio allocations are within specific portfolio risk constraints. Risk is evaluated in our portfolios based on three dimensions of volatility, and we evaluate exposure to other market factors and implement number of positions to hedge such exposures, including but not limited to equity beta, interest rates, volatility, and credit risk.
Are you seeking to outperform any benchmarks?
We seek an absolute return objective, but our most appropriate benchmark is the Barclays Capital Aggregate Bond Index. Although the construction of YPRO is very different from this index, we seek to exhibit a level a volatility that is relatively consistent with the Barclays Capital Aggregate Bond Index with enhanced yield and the ability to manage risk more effectively.
Why is this an important strategy for investors and advisors to consider?
We believe that finding income at managed level of risk is one of the most significant challenges that most investors and advisors face today. Given the low interest rate environment, investors have been forced to accept either a great degree of interest rate risk or credit risk to achieve their income objectives. Most investors choose credit risk by investing in bank loans and/or high yield bonds, which tends to be highly correlated with their equity exposure. The goal of YPRO is to provide risk-adjusted yields that are competitive with those types of assets, while still seeking to exhibit a low correlation with equities and a level of volatility that is consistent with bonds.
Since it’s an actively managed investment strategy, why launch YPRO as an ETF as opposed to another investment structure such as a mutual fund?
The ETF structure provides us with more efficiency in portfolio management, as it requires less daily management of flows. For the same reason, it also provides investors with a more tax-efficient investment as the structure typically results in less portfolio turnover and therefore a reduction in taxable transactions. Furthermore, ETFs provide investors with easy access, intraday liquidity, and full transparency in a timely fashion relative to mutual funds.
How can YPRO be used in an investor’s portfolio?
We believe that YPRO is most appropriate as a substitute to bond exposure within a total portfolio. It is designed to provide competitive income with bond-like volatility, and because YPRO is designed to exhibit a low correlation to equities, it is best complemented with equity exposure.