In a recent episode of “Behind the Ticker,” Yang Tang, co-founder of Arch Indices, discusses his career journey and the innovative approach his firm takes in constructing investment portfolios. With a background in commodity sales and macro solutions at major financial institutions like Barclays, Morgan Stanley, and Citi, Tang brings a wealth of experience to Arch Indices. The firm, founded in August 2022, aims to build better portfolios through a unique methodology focused on risk-adjusted contributions, departing from traditional market cap or equal-weighted strategies.
Ashenden explains the core concept behind Innovator's Defined Outcome ETFs, which provide a buffer against market losses in exchange for a cap on upside gains. These ETFs are constructed using a basket of flex options, which offer customizable tenors and strikes, allowing for precise defined outcomes. The firm offers various buffers, including a 9%, 15%, and 30% buffer against market losses over different periods, such as quarterly or annually. Additionally, Innovator has expanded its offerings with 100% buffer ETFs, providing complete downside protection, which has been particularly appealing to advisors and investors looking to equitize cash without principal risk.
The conversation highlights the practical applications of these ETFs. Ashenden emphasizes their utility in different market environments, particularly for conservative clients or those wary of investing at market highs. The ETFs' ability to reset within the structure without triggering taxable events and their flexibility make them an attractive alternative to traditional fixed income, especially in a high-yield, low-tax environment. Ashenden points out that these products can be effectively used as a conservative equity allocation or even as a fixed income alternative, providing attractive caps with full downside protection.
Tang explains the core principles behind Arch Indices’ approach, which revolves around variance optimization, a concept rooted in modern portfolio theory. This methodology emphasizes creating portfolios that achieve specific investment goals, such as income generation or total return, with the least amount of volatility. Unlike traditional methods that rely on expected returns, Arch Indices uses market-observed volatility and correlation to dynamically adjust portfolios. Their recursive optimization technique further refines this process, continually adjusting asset allocations to maximize returns while minimizing risk.
One of the standout products from Arch Indices is their ETF, VWI (Arch Indices Income ETF), which combines dividend-paying stocks and bond ETFs to deliver high income with low volatility. The ETF aims to provide investors with the highest possible income while minimizing fluctuations in portfolio value. Tang highlights the dynamic nature of the ETF, which rebalances quarterly to adapt to changing market conditions, ensuring that the portfolio remains optimized for both yield and risk. This approach allows the ETF to maintain a high yield, typically around 6.8%, while keeping volatility low.
Tang discusses the practical applications of the VWI ETF for different types of investors. He notes that the ETF is particularly well-suited for retirement-focused advisors and individuals, offering a stable income stream with lower volatility, which is crucial for managing sequence of returns risk in retirement planning. Additionally, the ETF can serve as a core holding within a broader portfolio, providing a foundation of income and stability while allowing for the inclusion of other growth-oriented assets. Tang also mentions that Arch Indices offers the strategy through SMAs via a partnership with Quorus, catering to clients who prefer a more tailored approach.
Overall, Tang emphasizes the importance of staying invested and managing risk effectively, particularly in volatile markets. The VWI ETF and Arch Indices’ broader strategy provide a robust solution for investors seeking to balance income generation with risk management. The firm’s innovative approach to portfolio construction, rooted in rigorous mathematical optimization, sets it apart in the competitive ETF landscape.
