AMWatch

Quant ETF inspired by Ray Dalio drops the most since March 2020

The new year market turbulence is inflicting the biggest loss since the dark days of the 2020 pandemic on an ETF riding a popular quant trade tied to the decades-long twin bull run in stocks and bonds.

Ray Dalio, co-CIO of Bridgewater Associates. | Photo: Amy Harris/AP/Ritzau Scanpix

The investing approach known as risk parity has been hammered this week as U.S. equities and bonds declined in unison on hawkish signals from the Federal Reserve. The systematic strategy, popularized by Bridgewater's Ray Dalio, allocates across asset classes based on risk and tends to suffer outsize losses when markets fall together. 

The USD 1.6bn RPAR Risk Parity exchange-traded fund (ticker RPAR) -- the biggest of its kind -- has dropped 3.4 percent in the five trading days through Thursday, on course for the worst five-day streak since March 2020.

The cross-asset volatility is also bad timing for RPAR's new sister fund launched this week, which seeks to amp up returns with extra leverage. The RPAR Ultra Risk Parity ETF (UPAR) has fallen in each of its first three trading days, including a 1.5 percent slump on Wednesday -- a drop that equals some of RPAR's worst moves in the past year.

Both funds were trading lower again on Thursday in New York as the S&P 500 fluctuated and Treasuries extended their retreat.

Risk-parity indexes hit records in 2021 as reopening optimism fueled stocks and commodities while dovish central banks kept bond yields in check. Now, a resilient US business cycle -- even as the omicron variant spreads -- is shifting the monetary policy outlook to disrupt the "everything rally."

These trades generally target a certain level of risk by allocating across assets based on their volatility. That means at times of market turbulence, they can be forced to unwind positions -- potentially exacerbating price moves.

Both UPAR and RPAR are actively managed but seek to match the returns of an index across four major asset classes: global equities, commodities, Treasuries and Treasury Inflation-Protected Securities, or TIPS.

Major ETFs in those asset classes underline the rough start to the year: the Vanguard Total World Stock ETF (VT) is down 0.9 percent this week. The iShares 20+ Year Treasury Bond ETF (TLT) has dropped 3.9 percent. The iShares TIPS ETF (TIP) has retreated 2.3 percent. Commodities are the only gainer -- the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC) has advanced 2.2 percent.

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